In a speech in Shanghai this week, Michael Pettis, professor of finance at Peking University, warned that China’s debt is closely linked to the government’s perceived overstatement of its gross domestic product (GDP).
The government is accused of perpetuating the existence of “zombie companies”, by granting loss-making companies loans. Banks in turn treat these companies as creditworthy, whereas in reality they should be written off as bad debt, Pettis said.
“If you believe there is bad debt that has not been sufficiently written down, you must believe that China’s GDP is overstated, relative to what it would be in any other country. That must be true,” Pettis said.
“If we are able to calculate GDP correctly, it would probably be half of the recorded number.” [Source]