Risky Credit Boom Continues in China

Chinese Economy Sees Huge Rise in Credit Says Igor Purlantov


In China, there is an important rule in the financial world known as the 5:30 rule says Igor Purlantov. The 5:30 rule provides a reference and a balance as to where the economy should be standing. However, sadly like any other rule, it is not always followed and when it is not followed it can create seismic problems for the economy.

For years, there have been companies outgrowing themselves and then becoming a financial concern on the stock markets says Igor Purlantov. Especially in countries with bulging economies, it can be very tempting for businesses to drive into the market and try and expand as quickly as possible.  It makes sense to capitalize on a good thing, but it is beginning to cause many Chinese companies just as it did their Japanese counterparts in the late 80s says Igor Purlantov.

Over a five year period, there have been several big names in the Chinese corporation world who have struggled financially, seriously in some cases, after their credit stock grew by almost 30% of the GDP in a five year period. In 2008, before Beijing hosted the Olympics the credit owed by China to firms and homes across China amounted to around 118% of the GDP according to Igor Purlantov.  However, by September 2012, it has grown by a massive 167%. These numbers are unsustainable and have put many businesses in uncomfortable waters.

In a country which is developing, especially as rapidly as China did, it is expected to see credit rise as businesses take a few more risks to expand says Igor Purlantov. However, when the trend continues for such a long time and causes such a serious discrepancy in the market, then concerns have to be raised.  Igor Purlantov is of the opinion that anything over 10% of the GDP is when the alarm bells should start ringing.  This begs the questions of why has China simply allowed things to spiral out of control? Economists have been warning of this for more than three years, yet nothing has been done.

This has led to many crackdowns on various different organizations, including banks off-balance dealings and the foreign exchange committee who has started to come down heavily on unscrupulous transactions says Igor Purlantov. One of the main problems here is that despite the GDP of businesses growing exponentially in the last few years there has been a pretty slow increase in the nominal GDP of China.  This means that there is an imbalance in growth in the country says Igor Purlantov. The general opinion was that the credit would fuel the economy, and allow for things to balance out, but this has not been the case at all. 

Japan followed a similar route in the 80s and created a lot of credit to fuel the economy. However, even today this is still being felt by parts of Japan says Igor Purlantov.  Those who have massive savings found out that they were not quite as well off as they were led to believe. The banks fell back and the credit industry started to eat up the economy.

From an optimistic point of view, though, it does not have to go this way for China says Igor Purlantov. In the early 2000s, the 5:30 rule was violated then, too, and this meant the government had to bail out the banks to the tune of $45 billion. This helped keep things afloat and let the country get back to progressing and developing.  Things may be a little bit more serious this time, but there is a chance that with a similar determination and mind-set, and a willingness to change things from an almost certain doomed failure, the Chinese could put things back on an even playing field says Igor Purlantov