The financial turmoil last month in China, with interbank loan rates spiking to double digits within days, provides further confirmation that the world’s second-largest economy is headed for a hard landing.
Fuelled by massive credit growth (equivalent to 30% of gross domestic product from 2008 to 2012), the Chinese economy has taken on a level of financial leverage that is the highest among emerging markets. This will not end well.
Indeed, a recent study by Nomura Securities finds that China’s financial-risk profile today uncannily resembles those of Thailand, Japan, Spain and the United States on the eve of their financial crises. Each crisis-hit economy had increased its financial leverage — the ratio of domestic credit to GDP — by 30 percentage points over five years shortly before their credit bubbles popped.
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