Credit and Credibility Project

Analyzing macroeconomic, financial, and political variables, this project examines the key sources of pressure within China’s financial system and China’s ability to manage these forces.  While it is increasingly apparent that China’s unprecedented credit growth is creating significant financial risks within China’s banking system, it remains a key subject of discussion how China has avoided a crisis so far and how effective the tools at Chinese authorities’ disposal will be in limiting the effects of these tensions in the future. 

The project evaluates the following economic, financial, and political risk factors in China’s financial system and the authorities’ tools and capabilities to mitigate financial risks:

• Sustainability of credit growth
• Increasing complexity in Chinese banks’ funding base and structure
• Balance of payments pressures
• Shadow banking
• Impact of high savings rate
• Pressures from internal rather than external debt
• The extent of Chinese government control over actors in the financial system
• Implicit guarantees and moral hazard resulting from the Chinese government’s commitment to political stability
• Policy credibility and investors’ perceptions of government actions

Providing accurate assessments of the trajectory of China’s financial system is important to understanding how the United States will need to engage China in the future – whether as a stronger economic competitor or a country facing increasing instability within its domestic politics and its economy. The policy implications of China’s economic future are an essential consideration for U.S. interests.