Has China’s era of credit-binge fuelled GDP growth come to an end?
Or has Chinese credit supply really been "rational" all along?
China has seen a marked deceleration in its rate of credit growth over the past decade, prompting pessimistic assessments from some pundits over the viability of its current economic development model.
For observers who have criticised Beijing for excessive dependence on credit supply to reach GDP targets, this easing growth is bound to have dire implications for China’s economic performance moving ahead.
Others argue, however, that China’s growth has never been dependent on excessive credit provision, and that any upticks in lending have simply been temporary episodes of counter-cyclical macroeconomic policy designed to compensate for short-term headwinds.
They instead view the slowing of credit growth as a clear sign that China is shifting towards a more sustainable, innovation-driven development model characterised by higher credit efficiency, following decades spent developing domestic human capital and R&D capabilities.
Chinese credit growth on the wane
Writing for the Wall Street Journal, Joseph C. Sternberg highlights a sustained decline in China’s rates of credit growth for at least the past decade.
“Despite robust new bank lending of around $680 billion, the total rate of credit growth is slowing dramatically: to 6.1% year-on-year in January, compared with an average of 9% a year in 2017 -24 and 18.1% in 2007- 16,” he writes.
The Chinese central bank’s adoption of “moderately loose monetary policy” for the first time since 2011 failed to whet the appetite of households or enterprises for greater leverage last year, with new bank loans dropping to a seven-year low of 16.27 trillion yuan.
Domestic commentators have highlighted the impact of China’s housing slump on credit growth, arguing that it has resulted in the same dynamics that underlie balance sheet recessions.
The bust in the property market which began in 2021 has prompted Chinese households and businesses to deleverage as opposed to borrow, as they repair the damage inflicted on their net worth by the drop in asset prices.
China’s own policymakers and pundits often point to this as the core reason behind the nation’s “insufficient domestic demand” - which consensus opinion views as its chief macroeconomic challenge.
Prominent commentators such as Michael Pettis have further argued that China suffers from an excessive and perilous dependence upon credit to motivate economic growth.
Sternberg contends that “the rapid expansion [of credit] has been Beijing’s primary means of achieving growth…for decades.”
As a consequence, the ailing rates of credit growth he highlights could be viewed as a sign that this risk-fraught growth model has run its course, and will no longer prove a viable means of priming GDP in future.
The perils of credit binges for Chinese banks
Wang Jian (王剑), chief financial sector analyst at Guosen Securities, points to a raft of problems that excessive credit supply can create for the banking sector.
“Credit allocation in excess of economic demand, or what is commonly referred to as insufficient effective demand, means that the demand for credit that satisfies lending standards falls short of the lending target,” Wang writes in the opinion piece “The Importance of Maintaining Rational Credit Growth” (王剑：保持合理信贷增速的重要性).
When Chinese banks are compelled to extend credit in excess of what the economy actually demands, then this can lead to an asset drought as well as the “dumping” of loans.
These artificial credit binges then negatively impact the asset quality of banks, by forcing them to relax lending standards and provide loans to less creditworthy borrowers in order to satisfy the growth targets set by policymakers.
These policy-driven credit binges can also undermine the profitability of banks, by warping the yield curves for their assets and squeezing their net interest margins. This in turn can have adverse impact on the capital adequacy ratios that serve as the key metric for the health of bank balance sheets.
“Excessive lending can disrupt the balance [of capital ratios],” Wang writes. “For example, in 2023, credit growth exceeded 10%, surpassing bank ROE, indicating an unsustainable level of capital adequacy.”
Is China’s credit growth rational or excessive?
While Wang Jian agrees that excess credit creation can spawn problems for the banking system, he parts ways from Pettis and Sternberg on the matter of whether or not credit supply in China has historically been excessive.
As proof of this, Wang Jian points to the concept of “rational credit growth” - which he deems to be “growth in credit that matches different stages of economic development.”
“China has long made use of a comparatively rough means of determining rational growth in credit, simply comparing growth in a broad credit measure - such as the M2 money supply or aggregate social financing - to growth in nominal GDP,” he writes.
Based on this method, Wang argues that China’s credit growth has remained at comparatively “rational” levels since the end of the Global Financial Crisis.
Wang points out that for at least the past decade, the growth in the lending balances of Chinese financial institutions have been roughly in line with nominal GDP growth, consistently maintaining a gap of five percentage points.
He further points out that the gap itself is likely the result of economic activity which isn’t captured in official GDP data - such as purchases of pre-owned homes and credit provided to China’s informal economy or to fledgling micro-enterprises.
“As a consequence, credit growth is just slightly higher than nominal GDP growth,” he writes.
“This is perhaps the meaning of matching, where matching isn’t at all a matter of strict equality.”
Credit binges as macroeconomic balancing tools
While Wang does not believe that China’s GDP growth has been dependent on excess credit supply, he does highlight the occasional use of credit quotas by Beijing as an macroeconomic tool of sweeping importance.
He considers China’s credit binges to be part and parcel of counter-cyclical stimulus, which is subsequently withdrawn once GDP growth resumes its apt course.
“Although there’s no doubt that China’s policies no longer make use of the credit quotas of the planned economy era, they still influence lending by banks,” he writes.
“Especially after 2018 when economic growth slowed, growth in credit instead stabilised, reflecting the ‘counter-cyclical’ nature of credit policy.
“That is, when the economy is under pressure, policymakers require that banks increase lending to support the economy, while when the economy overheats, the government suppresses credit growth.
“During the economic downturn in 2018, policymakers promoted rapid credit expansion, which was part of the counter-cyclical policy and cannot be considered excessive lending.
“Subsequently, as economic growth slowed and the economic structure adjusted, counter-cyclical policies gave way to cross-cyclical policies.
“Credit growth began to decline slowly, and began to decline significantly from 2024.”
Wang notes that by the end of 2025, the gap between nominal GDP growth and credit growth was only 2.21 percentage points, which he believes is far more “rational” than the prior long-standing gap of five percentage points.
Credit growth to ease as China’s economy transitions
Given that Wang does not believe China to have ever been excessively dependent on credit to fuel GDP expansion, he also remains unalarmed by the recent slowdown in loan growth.
Rather than view it as a harbinger of economic problems ahead, he instead views it as firm evidence that China has already shifted towards a healthier and more sustainable form of innovation-driven development which is less credit dependent.
“The extension of credit is a primary means for the banking sector to support economic growth,” Wang writes.
“However, this level of importance can differ at different stages of economic development.
“For example, as economic drivers shift from investment to technological innovation, the economy’s demand for credit will decline.”
Wang believes that China’s economy is now undergoing such a shift towards more credit-efficient sectors that require less leverage to maintain healthy growth.
“As China’s economic transformation yields major results, the industrial structure per unit of nominal GDP is upgrading, and the demand for credit from emerging industries will decrease, or even experience negative growth as existing loans mature, and new credit issuance falls below the amount maturing,” he writes.
“The fall in demand for credit is consistent with the experience of a change in economic models.”
Wang notes that this view is congruent with the official position of the Chinese central bank, as outlined by its monetary policy execution report for the third quarter of 2025.
“A slight slowdown in the growth rate of total financing is natural and consistent with the shift of China’s economy from high-speed growth to high-quality development,” the report reads.
“While the growth of social financing and the money supply is generally in line with nominal economic growth, a slightly lower loan growth rate is also reasonable, reflecting changes in the financial supply-side structure.”