Chinese growth has been helped by credit growth in recent years. Companies' borrowing helped raise debt from 150 percent of the economy to 270 percent of the economy in 10 years.
Data suggests that credit growth continues to be important. Off-balance-sheet lending has replaced bank lending.
The International Monetary Fund (IMF) has warned about the level of China's debt. This is not new. The IMF has made such warnings in the past. However, the Chinese government seems to be taking debt seriously. A policy of stabilizing debt as a share of GDP is likely. Limits on credit should not stop the consumer from playing a bigger part in the economy. Future consumption will have to be paid for with lower savings. However, slower corporate credit creation will slow the overall pace of economic growth.
Is this too late? China's debt level is unlikely to create major instability. China's debt is owed to Chinese lenders. Both borrowing and lending can be controlled by the Chinese. Of course, bailing out bad loans may not be economically efficient, and trend growth may be hit. But the base case should be a growth slowdown as debt is controlled, not the abrupt growth decline of a credit crisis.