In the aftermath of a global financial crisis, China's manufacturing and export-dependent economy crumpled. And the ruling Communist Party panicked. Party leaders estimated they needed to sustain a minimum annual growth rate of 8% if they were to contain political unrest that could threaten authoritarian rule.
The solution was to unleash what economists have called, the greatest example of monetary easing in history. An enormous wave of easy loans channelled through the state-owned banking system. In absolute terms, China's total debt has ballooned from around $6 trillion, at the time of the financial crisis to nearly $28 trillion dollars, by the end of last year. As a percentage of GDP, total debt has risen from 140% to almost 260% over the same period.
There is no question that the Chinese economy was saved in the short term by the government's decision to open the credit floodgates. But that has resulted in an economy addicted to borrowing and afflicted with serious asset bubbles. The ultimate test will come when Beijing eventually attempts to wean the country off the state dependence.