With the world still suffering the hangover from the last financial crisis, another debt bubble might just be enough to crippled the global economy. China’s government is looking to take a proactive stance on the country’s potential debt bubble. Beijing instructed banks to be more careful in regards to lending to individual borrowers amid rising debt levels.
The China Banking Regulatory Commission has sent a letter to banks, urging them to strengthen their risk management. Apparently, some banks have been too lax in lending. It is also believed that personal consumer loans have been used to fund investments.
The bank is urging banks to strengthen their vetting process and to ensure that loans are being used properly. While the government issues guidelines for making loans, banks ultimately have the final say.
Bubble appears to be building
Debt levels have risen substantially since the global financial crisis. In 2008, total debt levels for government, business, and consumer debt was estimated to be 140 to 150 percent of the GDP. In the years since debt levels have been rising and may have reached as much as 250 percent or more of debt.
Debt levels for private households have reached 40 to 50 percent of China’s GDP, a substantial rise from 20 percent only a few years ago. Debt is being driven by high inflation. With China’s economy growing so rapidly, inflation has been hard to subdue. Properties, however, often make great investments for hedging against inflation.
A large portion of this debt has been to businesses involved in the construction industry. A large portion of consumer debt has also been for mortgages to buy properties. While the Chinese government has been trying to cool off the housing and construction industries, the fact remains that property could be especially vulnerable.
Optimism leading to debt bubble?
China’s economy has been one of the strongest performing in recent years. As is often the case, investors and individuals alike often assume that the good times will keep rolling. When this happens, the risk of a bubble building only increases.
The Chinese government thus far appears to be succeeding in subduing markets. Housing prices have leveled out and home sales dropped by nearly 8 percent in the first quarter of 2014. Property developers have been slashing prices to build up demand, which could hurt the overall value of the market, but should relieve pressures of a bubble building up.