Since China embarked on a credit-fueled stimulus package in 2009 designed to stave off the impact of the global financial crisis, the rapid buildup in the country’s aggregate debt has become a source of concern. Although successful at the time, the stimulus has increasingly become viewed as ill-judged by government officials. As a result, the new leadership is making a concerted effort to quantify the leverage situation and control associated risks. Measures to increase capital discipline in the economy are gaining traction, but Beijing increasingly finds itself striking a balance between managing debt risks and maintaining adequate economic growth.
China’s RMB 4 trillion 2009 economic stimulus package—estimated by some analysts to have cost closer to RMB 10 trillion—was effective in maintaining the country’s rapid economic growth in the short term. (RMB 10 trillion today is equivalent to approximately $1.5 trillion.) But since 2011, China’s headline growth rate has slowed by a third; the country’s aggregate debt level has doubled; and financial markets have become increasingly skeptical about the ability of local institutions, including the huge state-owned banks, to meet their resultant liabilities. The stimulus package, a disproportionate amount of which was invested in real estate and heavy industries, has also exacerbated social issues such as housing affordability and environmental degradation while reinforcing the dominance of state-owned enterprises.
Since coming to power in March 2013, the new government, led by President Xi Jinping, has taken a more aggressive approach to tackling these issues. In recent months, both bank and noncredit expansion have slowed to multiyear lows, while the Shanghai interbank offered rate (SHIBOR, a gauge of liquidity in the financial system) has experienced several bouts of turbulence as the People’s Bank of China has reduced the size and frequency of its weekly injections into money markets. Financial regulators have issued new guidelines on shadow banking and are also looking to liberalize interest rates, a key stage in promoting a “decisive role” for the market across the economy.