First published: Financial Times, 29/04/2016
Credit build-up will end with serious consequences for the global economy
On one of my first trips to China in the early 1990s, on the drive from Beijing airport, I remember gazing out at hundreds of workers labouring with little more than shovels on a new highway snaking its way through farmland towards the capital. By the time the Olympics came to the city in 2008, the road had been joined by a second expressway and China had grown into the world’s largest construction market. Last year, it completed the world’s second-highest building: the Shanghai Tower, 632m of luxury offices, designer shops and a high-end hotel.
But there is a bit of folklore about the topping out of skyscrapers: the builders’ ceremonial placing of the final beam often heralds the onset of grim economic news, coinciding with the end of a credit cycle that has funded a frenzy of lending for ever-bigger projects. And indeed, as the economy slows markedly, China is increasingly dependent on credit creation. The share of total credit in the economy is approaching 260 per cent and, on current trends, could surpass 300 per cent by 2020 — exceptional for a middle-income country with China’s income per head. The debt build-up must sooner or later end — and when it does it will have a significant impact on the global economy….Read more: