http://curiouscapitalist.blogs.time.com/2010/02/25/time-to-worry-about-china/
This problem gets at a much bigger issue: What damage has China's stimulus plan done to its financial system? China's GDP surge was created by a credit boom of biblical proportions. Banks granted almost twice the number of loans in 2009 as they did the year before, an amount equivalent to nearly 30% of GDP. This increase in credit runs counter to usual economic logic. In a downturn, banks should become more cautious, and there is less demand for loans anyway as corporations scale back investments. But China's banks headed in the opposite direction. Could all of this deluge of loans have gone to creditworthy borrowers, to be spent on profitable projects that would allow them to pay their bankers back? Unless Chinese bankers have some superhuman powers to analyze credit risk (and I assure you they don't), that seems impossible. If China's local governments might be in trouble with their debt, what does that imply about state companies and the private sector? The question is not whether non-performing loans (NPLs) at China's banks will rise. The question is by how much, and how destabilizing could that be?
Read more: http://curiouscapitalist.blogs.time.com/2010/02/25/time-to-worry-about-china/#ixzz0ga5vDKw6
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