Booms, bubbles, blow-outs: exploring patterns in China's credit expansion

Abstract

We examine China's economic expansion, financial deepening, and equilibrium levels of bank credit. To ensure we capture the impact of reductions in financial repression in transition economies, we use IMF and World Bank data that include evidence from CEE economies to assess the validity of the excess growth argument. We evaluate China's economic fundamentals and credit expansion univariately and compared to the historical expansions of 54 developed, emerging, and transition economies. We follow a Hodrick-Prescott (HP) filter approach and use panel data regression to estimate expected growth in the bank credit to the private sector to GDP ratio (BCPS), allowing comparison with actual outcomes. We find that China's credit growth is not, in general, inconsistent with its economic growth. Lending patterns and their impact on economy-wide efficiency, rather than the level of growth in China's banks' lending, should be the focus of examinations of the sustainability of China's 'credit boom'.