More stimulus isn't the answer to China problems

FEW buzz phrases scare economists more than "new paradigm". If such things existed, Japan would still dominate the world economy, risk would have been eliminated from Wall Street, and the euro would have spread boundless prosperity from Berlin to Athens. So why do so many market observers continue to insist that basic principles of growth and stability don't apply to China? News that exports fell 3.3 per cent year on year in January, while imports fell 19.9 per cent - the most in more than five years - don't seem to have fazed many analysts. Bloomberg China economist Tom Orlik points out that the numbers may have been skewed by pre-Lunar New Year buying last year and a crackdown on mis-invoicing of exports to Hong Kong. More broadly, though, optimists are simply convinced that President Xi Jinping will soon introduce more stimulus measures to keep growth ticking above 7 per cent.

The idea that China can borrow indefinitely in order to prop up growth simply doesn't wash. In a new report on the world's growing debt glut, McKinsey highlights three huge risks: unsustainably high government borrowing, households in over their heads and China. The mainland earns its singular position because of another trio of concerns: too much debt concentrated in real estate; the scale and complexity of its shadow-banking entities; and rampant off-balance sheet borrowing by local governments.

Driven by the vast shadow-banking sector (which contains at least US$6.5 trillion of debt) and a construction boom fuelled by local officials, China's debt buildup accounted for a third of all borrowing globally since 2007. In that period, total Chinese debt quadrupled to US$28 trillion by mid-2014 from US$7 trillion. China's public debt now stands at 282 per cent of gross domestic product - a far higher debt ratio than that of advanced economies like the US, Germany and Australia.