Is China Hiding Mother of All Debt Bombs?

Loose credit, economic stimuli dangerously over-leveraged China
By Mark Russell,  Newser Staff
Posted Sep 9, 2012 8:00 AM CDT
A man photographs bare riverbed of Huangpu River as a result of the lowered water level in Shanghai, China, Monday July 30, 2012.   (AP Photo/Eugene Hoshiko)
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(Newser) – With China's factory production slowing to "just" 8.9% year-over-year in August, down from 9.2% in July, economists there are calling for a stimulus to keep the behemoth economy on track, notes the AP. But that could just fuel a bigger economic disaster, as China's economy has grown dangerously overextended by deficit spending since 2009, reports the Diplomat. Unlike the West, most of China's stimulus has come from banks, not the national government, but banks have taken on $5.4 trillion in new debt since 2009, equal to 73% of China's GDP.

While that 2009 stimulus kept China's economy pumping, despite a worldwide slowdown, it also created a huge property bubble that is threatening to destabilize the nation's banking system. Loose credit has also let local governments around China ring up another $1.7 trillion in debt, officially—unofficially, it could be double that. And the country's off-the-books "shadow" banking system could have another $1 trillion tied up in unregulated, high-rate investments. Beijing is aware of its debt bombs, but so far steps taken have mostly just hidden the problems, not fixed them. "One thing is evident here," concludes the Diplomat. Either our eyes deceive us, "or Chinese banks are trying to hide the mother of all debt bombs."

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