Japan lesson on China debt: extend, don't pretend

JAPAN holds an important lesson for China. Like the People's Republic today, it battled with runaway debts in the early 1990s. The key is to tell banks whose loans are going bad: If you must, then extend - but don't pretend.

The first part of that message is already being put into practice. Chinese regulators and the central bank recently suggested that banks should roll over credit to troubled local government financing vehicles if they can't pay interest or principal. This is reminiscent of the Japanese experience.

After the bubble in Japanese stocks and property burst, companies did shed debt. But the deleveraging dragged on. Banks kept making new loans to debt-laden borrowers so the latter could keep repaying old liabilities.