Rhetorically, at least, President Xi Jinping acknowledges the exact dilemma that spooks the rest of the world. If China falls back on excessive stimulus, he was quoted recently as saying in the Communist Party’s flagship journal, Qiushi, it will “create new contradictions and problems.”
Yet he seems to ignore his own advice. Two years ago, in a much-heralded effort to address the problem of bad debt in the banking system, financial authorities introduced a program to swap the bank borrowing of local government-controlled entities—much of it linked to the slumping real-estate sector—for municipal bonds. The arrangement should have reduced the overall volume of bank loans. Instead, banks simply filled the slack with new lending. In effect, the government had created a whole new stream of credit.