Concerns about China’s ballooning debt indicators have been cycling on and off for nearly a decade. BIS put out an alert in September about China’s increasing “credit to GDP gap,” a warning that the pace was excessive relative to historical trends. Add to this worry the dependence of some banks on wholesale borrowing and re-emergence of shadow-banking and it is easy to understand why some observers have raised the possibility of a destabilising “Lehman moment.”

Yet predictions of an imminent collapse seem to come and go with the seasons. Part of the explanation is that China’s debt is largely the result of state-owned banks lending to state entities. Given the government’s strong financial position, there is less risk that isolated defaults or bank runs could derail the financial system. China’s problem also differs from other crisis cases because of the unique role that escalating land prices have played in shaping debt indicators and asset values.

The impact of rising land prices is unique to China because an extensive private property market only emerged after housing was privatised and land auctions were initiated a decade ago. In the aftermath, credit expansion supported a fivefold increase in land prices in the major cities (eightfold in dollar terms). This in turn has caused fixed asset investments to soar from 45 to 80 per cent of GDP. But what counts as investment for GDP purposes is gross fixed capital formation which excludes the value of land and transfers of existing property and as a share of GDP has hovered around 45 per cent. While the credit surge has driven up debt indicators, it has not spurred GDP growth.