China’s First Quarter Credit Expansion

CHINA FINANCIAL - Report 27 Apr 2017 by Michael Pettis

Special points to highlight in this issue:

• What many analysts call China’s higher-than-expected GDP growth rate for the first quarter should not be classified as “higher than expected” if it is accompanied by higher-than-expected credit expansion. In China, growth is largely a function of the unsustainable increase in debt, and until the relationship is broken nothing will have changed.
• For now China’s debt burden must grow annually by around 45 percentage points of GDP, and probably more, in order to achieve the targeted 6.5 percentage point increase in annual GDP. This ratio has been increasing over time, as it must, and will continue to increase.
• If we assume that China’s sustainable growth rate is roughly 3 percent, which I believe to be the upper limit of sustainable GDP growth, in order to achieve the “excess growth” that allows China to reach its GDP growth target of 6.5 percent, excess credit must grow nearly four times as fast as “excess growth”. This gives an idea of just how much credit expansion it takes to keep the economy growing at current rates.

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