When the global financial crisis erupted in late 2008 and China responded with a massive stimulus package, the first reaction of investors was one of great relief. It was clear within weeks that the state-led investment push would propel the Chinese economy forward, making it one of the world’s few reliable engines of growth.
But the second reaction was great nervousness at the manner in which China’s stimulus was deployed: it was pumped through the state-owned banking system. Banks issued Rmb9600bn ($1568.49bn) of new loans in 2009, 95% more than a year earlier. It seemed only a matter of time before the big jump in economic growth would boomerang onto the banks’ balance sheets as a big rise in bad loans.
