Credit Booms—Is China Different?

IMF Working Papers, January 5, 2018

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Strong Chinese output growth after the Global Financial Crisis was supported by booming credit.
This credit boom carries risks.
International experience suggests that China’s credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment and/or a marked growth slowdown.
Several China-specific factors—high savings, current account surplus, small external debt, and various policy buffers—can help mitigate near-term risks of a disruptive adjustment and buy time to address risks.
If the risks are left unaddressed, these mitigating factors will likely not eliminate the eventual adjustment, but make the boom larger and last longer.
Hence, decisive policy action is needed to deflate the credit boom safely.

The post-Global Financial Crisis credit expansion in China is linked to strong output growth, but the expansion resembles international credit booms that have ended in disruptive adjustments.
China-specific mitigating factors reduce near-term vulnerability but do not remove medium-term systemic risks if credit dynamics continue unchecked.
The interaction between high savings, external balances (current account surplus, small external debt), and policy buffers can delay but not prevent an eventual adjustment, potentially increasing the magnitude and duration of the boom.

Take decisive policy action to deflate the credit boom safely.
Use the near-term window afforded by China-specific buffers to implement measures that address credit growth drivers and reduce buildup of systemic risks.
Prioritize policies that reduce reliance on credit-driven growth to avoid a larger and longer eventual adjustment.

IMF Working Paper — "Credit Booms—Is China Different?", January 5, 2018.

Credit Booms—Is China Different?, WP/18/2, January 2018
- Credit Booms—Is China Different?, WP/18/2, January 2018 (Markdown version)
- Credit Booms—Is China Different?, WP/18/2, January 2018 (PDF)