When debt has built up that fast in the past — as in the United States during the housing bubble — financial crises have typically followed.
“That should be setting alarm bells off,” said Mark Williams, chief Asia economist at Capital Economics.
When debt finances excessive building, eventually too few people or companies are willing to buy all the houses, apartments and offices. That can send prices sinking and trigger loan defaults by developers and property owners. Banks typically then curtail lending, thereby slowing growth.
Most economists think China’s government would bail out its state owned banks and provide enough money so they could continue lending. It would also support any companies whose bankruptcy would threaten growth.
“I don’t think anybody important is going to be allowed to go broke,” Cheney said.
China’s government has adopted a reform program intended to strengthen its financial sector and transform its economy with more consumer spending and less dependence on construction and investment.
The IMF said those efforts could make growth more sustainable and boost consumption. But it said progress “remains incomplete.”
Premier Li Keqiang, China’s top economic official, promised in March to give market forces a “decisive role” in allocating loans. Days later, the government let a corporate bond default for the first time, rather than bailing out the investors, to encourage more market discipline.
Also that month, China cleared the way for the first five privately owned banks. The government hopes they will lend more to entrepreneurs and private businesses and provide competition for the state-owned giants.
The measures are having some effect. New lending slowed in March. And the expansion of China’s money supply rose at its slowest rate since 1997. Home sales in the first quarter declined 5.7 percent from a year earlier.
But there’s been a cost to China and the global economy. The economy’s growth slowed to 7.4 percent in the first three months of the year, compared with a year ago. That was down from 7.7 percent in last year’s fourth quarter. While still far ahead of developed economies such as the United States, that rate was well below the double-digit growth China had enjoyed for decades.