According to an article published on the Wall Street Journal,"investors have made billions betting against economies in which debt is rising and home prices are soaring. They have had particular success targeting the banks that fund these booms".
Right now, their target is China. Some compare China to the U.S. in 2007. Others cite Japan before the 1989 real-estate bust. China bulls acknowledge the risks but say the government has the money and expertise to defuse the problems.
"In the Western case, the official response was denial or complete ignorance," says Mr. Magnus a senior independent economic adviser to Swiss bank UBS AG. In China, where the central government controls the economy and policy makers witnessed the U.S. bust, Beijing "will be able to respond in ways we [in the West] weren't capable of. But it doesn't mean it won't be painless," he says.
China's corporate and household credit has risen quickly, from around 120% of gross domestic product in 2008 to more than 170% today, according to Bank for International Settlements data, which does not include debts owed by financial companies.
The U.S. in its credit boom rose from 143% in 2001 to 177% in 2008. Japan had a similar run up in the decade before 1989. Economists say quick jumps in debt—rather than absolute levels—are the determinants of future crises.
One key area of concern is China's banks. As in the U.S., much of their loan growth in recent years has been off-balance-sheet. In China's case, it has been wealth-management products and other devices that allowed banks to keep lending even despite regulators' efforts to slow things down.
Much of this shadow-banking growth is being monitored by regulators. "The shadow-banking thing has been both known and blessed for a time," says Jaspal Bindra, Asia chief executive for U.K.-based, emerging-markets-focused bank Standard Chartered. "Then I think they decided that people have taken it to a point where it's been abused."
In June, a credit crunch hit China's banking system, reviving fears that the kind of credit market paralysis that hit the U.S. in 2008 and 2009 could wreak havoc on the financial system. The squeeze was engineered by the central bank to rein in what it saw as out-of-control credit growth driven by the country's shadow-banking system. While the credit squeeze caused turmoil, it eased once the central bank let the cash flow again. It was also a sign regulators are aware of the problems in the system.
Another difference: America's bubble originated in home mortgages. China's house-buying frenzy has been financed mostly with cash. The big debt growth has been to developers, companies and local governments, some of whom have implicit backing from the state.
In Japan, "no systemic financial crisis occurred, but financial stress was hidden," writes Haibin Zhu, J.P. Morgan's chief China economist. Banks refinanced loans even though there was little prospect the beleaguered corporate borrowers would pay them off in the end. This led to "zombie companies and zombie banks" and little new investment in the economy.
He worries that without reforming the banking and corporate sector, China could put off a restructuring of debts needed to cleanse the economy. "The consequences could be more severe for China," he says. "China is not as wealthy as Japan was and so would not be able to sustain as much stress."
