China pledges to take on the 'original sin' of its financial system

Beijing

CHINA'S much-vaunted campaign to tackle its leverage problem has captured headlines this year. But to understand why they're taking on the challenge - and the threat it could pose to the world's second-largest economy - you need to dig into the mountain.

Characterised in state media as the "original sin" of China's financial system, leverage has swelled over the past decade, partly because policymakers were trying to cushion a slowdown in growth from the old normal. What's fuelled the leverage has been a rapid expansion in household and corporate wealth looking for higher returns in a system where bank interest rates have been held down.

The unprecedented stimulus unleashed since 2008 effectively brought to life the "monster" China's leadership is now trying to tackle, says Andrew Collier, managing director of Orient Capital Research Ltd in Hong Kong and author of Shadow Banking and the Rise of Capitalism in China. Implicit backing from the central government …