For years, China watchers have warned that banks there are vulnerable to failure because of bad debt that the banks refuse to recognize. Now the IMF says that China’s corporate debt, which stands at 145 percent of Gross Domestic Product, “is a potential risk to the global economy.”
Interestingly, the IMF was not the first establishment source to call attention to China’s corporate debt problem.
The head of China’s central bank (People’s Bank of China) has long decried the “private” debt build-up there. And, in May the official People’s Daily newspaper ran an interview with an unidentified “authoritative figure” who warned that soaring debt levels could trigger a systemic financial crisis.
However, 55 percent of the corporate debt is owed by state-owned enterprises, making unlikely any solution other than shoring up the companies.
Still, a deputy director of People’s Bank of China has said that “zombie companies” should be allowed to die, calling for an orderly system that will permit financial institutions to go bankrupt while restructuring those that need restructuring. “Shut those that need to be shut,” he said, “and strengthen market discipline.”
A communist calling for “market discipline?” Slowly Austrian economic theory is being grasped by economists trained in Keynesian economic theory. But, it is not happening fast enough to reverse the suicidal course that Keynesians have taken us on.
It is not likely that China will stand back and not print more money as corporations start to fail and unemployment increases. China will print more renminbi (yuan), and serious inflation will take hold there.