Banks give China the credit of the doubt

China has been working hard to convince the world that it’s not a financial crisis waiting to happen. Judging from the latest data on cross-border lending, banks are buying it. Foreign banks’ total exposure to China reached US$750 billion ($1 trillion) in June 2017, up from US$659 billion a year earlier, according to the Bank for International Settlements (BIS). That’s a big contrast to a couple of years ago, when lenders were pulling tens of billions out amid concerns that a combination of high indebtedness, excessive investment and slowing growth would precipitate a wave of defaults. What changed? For one thing, China’s economy (according to the suspiciously smooth official data, at least) has proven more resilient than expected: the pace of growth has accelerated from a mid-2016 low of 6.7 per cent, and forecasters have raised their projections for 2018. Perhaps more important, Chinese officials have advertised their commitment to controlling debt and containing an overheated property market. That said, it’s odd that banks would think China is getting debt under control even as they provide more of it. Although the accumulation has slowed in some areas, it has boomed in households and elsewhere. By one early-warning measure — the difference between the current and long-term levels of business and household credit as a share of gross domestic product, also known as the credit gap — China and Hong Kong are still by far the riskiest countries tracked by the BIS.

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