Mark Carney concerned at impact of China's debt
The Bank of England's Governor, Mark Carney, has voiced his concerns over the threat posed by China to the global economy, stating that its rapid growth was fuelled by debt, and comparing it to the Great Depression of 1929. He added that China's 'debt boom owed much to the explosion of shadow banking'.

The Governor of the Bank of England has warned of the threat posed by China to the global economy – arguing its rapid growth since the financial crisis has been fuelled by debt.

Speaking last night, Mark Carney recalled the recent financial crisis following the ‘massive increases in household debt’.

He said this was ‘last seen in the Great Depression’ that followed the 1929 Wall Street Crash.

Describing ‘this time it’s different’ as ‘the four most expensive words in the English language’, Carney then referred to the growing problems in China which wiped billions off stock markets across the world.

Debt fears: Mark Carney has warned of the threat posed by China to the global economy

He said the ‘aftermath of the global credit crunch has been severe’, with global output still 10 per cent below pre-crisis levels.

He added: ‘These challenges appear more pressing as some are now questioning their faith in another era – China’s glide path to global economic hegemony.

'China’s economic miracle over the past three decades is extraordinary, and it has helped to lift billions of people around the world out of poverty.

'However, the Chinese economy’s post crisis performance has been bolstered by a large build up of debt, which has more than doubled to reach almost 200 per cent of GDP.’

Carney added that – like in the ‘advanced world’ – China’s ‘debt boom owed much to the explosion of shadow banking’. This is the vast network of loosely regulated financial companies which provide alternatives to banks.

Three Truths for Finance - Carney's speech

Mr Carney was speaking at the Harvard Club UK dinner at St Saviours Southwark Cathedral, where John Harvard was baptised - he eventually became benefactor to the famous US university that bears his name.

He explained how at Harvard there is a statue of John Harvard commemorating 1638 as the year of the university's founding.

'The “Statue of the Three Lies” is part of Harvard legend,' explained Carney as no one knows what John Harvard looked like, the college was founded two years earlier and it was not founded by Harvard himself.

Carney said: 'The Three Lies in question are harmless fun. But they should remind us how deeper untruths can persist, embodied in monuments or sustained by conventional wisdom and mores.

'We gather this evening almost seven years to the day that the failure of Lehman Brothers shattered conventional wisdom and laid bare three lies about finance. Unlike the statue’s three lies, those falsehoods have had lasting consequences.'

He then listed his three financial lies:

Lie I: This time it is different

Lie II: Markets always clear

Lie III: Markets are moral

The full transcript of Mr Carney's speech is available here from the Bank of England website, below is an excerpt.

LIE I: “THIS TIME IS DIFFERENT”

The first lie is the four most expensive words in the English language: “This Time Is Different.”

This misconception is usually the product of an initial success, with early progress gradually building into blind faith in a new era of effortless prosperity.

It took a revolution in macroeconomic policy to help win the battles against the high and unstable inflation, rising unemployment and volatile growth of the 1970s and ‘80s.

In no small part due to my predecessors, particularly Lord King, the stagflationary threats in the UK were tamed by a new regime for monetary stability that was both democratically accountable and highly effective. Clear remits. Parliamentary accountability. Sound governance. Independent, transparent and effective policy-making.

These were the great successes of the time and their value endures today. But these innovations didn’t deliver lasting macroeconomic stability.

Far from it. Price stability was no guarantee of financial stability. An initially healthy focus became a dangerous distraction. Against the serene backdrop of the so-called Great Moderation, a storm was brewing.

Debt was building rapidly, with total non-financial debt in the G7 doubling to 300 per cent of GDP between Prime Ministers Thatcher and Brown.

Growth built on borrowing: Mr Carney spoke about the rise in debt through the 2000s in his speech - this chart from nationwide shows how house prices leapt compared to wages through that era

In the US and UK, this was led by massive increases in household debt, the likes of which were last seen during the Great Depression.

Several factors drove this debt super-cycle including demographics and the stagnation of middle-class real wages (itself the product of technology and globalisation).

In the US, households had to borrow if they wanted to increase consumption. “Let them eat cake” had become “let them eat credit.”

Financial innovation made it easier to do so. And the ready supply of foreign capital from the global savings glut made it cheaper.

Most importantly – and this is the lie – complacency among individuals and institutions, fed by a long period of macroeconomic stability and rising asset prices, made this remorseless borrowing seem sensible.

After the reckoning, the ensuing crisis and feeble recovery would look very much like all others that have followed prolonged credit booms.

Policymakers quickly disassociated themselves from the received wisdoms of the Great Moderation and scrambled to re-learn the lessons of the Great Depression. That process continues today as central banks contemplate current parallels with the late 1930s.

The aftermath of the global credit crunch has been severe. Global output is now ten percent below its pre-crisis trend, and with global nominal growth running two percentage points short of its pre-crisis average, the challenge of deleveraging remains acute.

These challenges appear more pressing as some are now questioning their faith in another new era – China’s glide path to global economic hegemony.

China’s economic miracle over the past three decades is extraordinary, and it has helped to lift billions of people around the world out of poverty.

However, the Chinese economy’s post-crisis performance has been bolstered by a large build-up of debt, which has more than doubled to reach almost 200 per cent of GDP.