Is China’s credit over-heating?
Lately, when China-interested economists put aside the currency issue, they talk about bubbles. Some have argued that China will have to tighten its credit policy in order to avoid repeating the US’s mistake in creating a credit bubble. However, the following graphs tell a different story.
The loan to deposit ratio remains at a “reasonable” level and deposits are growing almost as fast as loans in China. If you compare China’s situation to the US’s, you notice that the loan to deposit ratio in China is not inflating like in the US preceding the crisis (credit bubble). It would suggest that there is no credit bubble in sight for the Chinese and there is still plenty of room for credit growth. Here’s a graph containing both loan to deposit ratios:
During the 2004 Chinese export boom, the loan to deposit ratio fell constantly. The Chinese authorities had decided to restrain interior demand in order to relieve some of the pressures on inflation. Since the recent crisis, inflation became less of a threat. China’s loan to deposit ratio then picked up to stimulate internal demand; but, it is still well below its pre-2004 levels and even further from the US levels.
China is indeed faced with some constraints to growth: its enormous stimulus package coming to an end and an inflation rate showing signs of over-capacity growth, but credit does not appear to be one of them.
Note: Chinese real estate remains, in my opinion, an ambiguous variable regarding bubbles.