By Tom Bradley

I wrote last week about Canada’s consumer debt challenge and noted that the scary numbers were a risk to the Canadian economy, but that other factors, including global economic trends, would be more important drivers of our stock market. One of those trends is also debt related – the credit boom in China.

With China’s economic fortunes increasingly linked to credit growth, investors have to be asking the question, Will the Chinese ever-increasing use of debt hit a wall and slow down the economy? Is China pulling a U.S. circa 2005, or are the country’s finances so strong that credit abuse can be easily dealt with?

RBC has come out with an excellent piece that provides an overview of What Looms After China’s Credit Boom. Chief Economist Eric Lascelles paints a detailed picture of what’s happening in China and how complicated and nuanced the situation is. He admits that it’s difficult at this stage to come to any firm conclusions, but finishes by saying, “The bottom line is that China’s credit position is not as bad as it first looks and not as bad as we had feared.”

Some of the things I took away from reading the report were:

• The ramp-up of debt has definitely enhanced China’s GDP growth, and has served to smooth out the ups and downs. A moderation in credit growth will almost assuredly mean slower economic growth going forward.
  
• The level of China’s debt is not as concerning as the pace with which it’s growing.
  
• There are clear excesses and abuses going on with local governments and in the shadow banking system (which includes an array of wealth management products being sold to yield-hungry investors).
  
• How China deals with its debt issues is important – it’s the second largest economy in the world.

This isn’t a light read, but it is one of the best I’ve seen at pulling this complex topic together into a readable, understandable form.