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One of the most striking facts unearthed by the International Monetary Fund in its recent review of China’s economy was how much of a risk Beijing was taking by not aggressively deflating its credit bubble.
IMF economists looked at 43 countries over 50 years and found that just four had seen credit grow as rapidly as China had in the past five years – and all four faced banking crises within three years of such supercharged growth.
The IMF review didn’t name the other countries. But in response to a request from China Real Time, the IMF filled in the blanks.

The other four are:
–Brazil (banking crisis in 1994)
–Ireland (banking crisis in 2008)
–Spain (banking crisis in 2008)
– Sweden (banking crisis in 2008)
In all those countries, debt grew by between 75% and 100% of GDP over five years. During the last five years, the IMF estimated, China’s domestic debt has increased by 73% of GDP.
All this doesn’t mean that China is doomed to repeat the failures of the other countries. The IMF urged China to start taking its credit problems more seriously, especially by reducing the expansion of local government debt. If deleveraging cut growth in the next year or two, the IMF said, so be it. Better a little less growth now than a lot less growth later.
“Without a change in the pattern of growth”—meaning less reliance on credit to fuel GDP gains – “the likelihood of a shock triggering financial disruption and/or a sharp slowdown will continue to rise,” the IMF warned.
Tao Zhang, China’s representative to the IMF, said Beijing is aware of the risks. “By striking a fine balance between stabilizing growth, on the one hand, and adjusting the economic structure and promoting reforms, on the other, my authorities are confident that the Chinese economy will be able to settle on a more sustainable and balanced growth path,” he wrote in a response to the IMF review.
To be continued…
–Bob Davis