Is China a ticking economic time bomb?

Yes, according to many analysts, who underline the country’s credit boom. For example, a research note by Standard Chartered, which was published on July 21, noted China’s total debt to GDP ratio had surpassed 250 percent. You could have shrugged “so what” if it was not the world’s the world’s biggest trading nation and second-largest economy.

Economics consultancy Oxford Economics argues “a [Chinese] financial crisis would have strong effects through trade channels, especially in Asia and for commodity producers.” The country’s limited global financial linkages could curb financial contagion. But if the crisis were to spread to Hong Kong, it could spread through the city’s international banking system. Global confidence would be undermined as well.

Cross country evidence suggests we should really be worried: As the IMF notes in its most recent report on the Chinese economy, which was released on July 31, credit booms of a similar size have often lead to a recession, banking crisis, or both in the past. But the Fund also underlines that China is more resilient than precedents: “Total public debt is relatively low; public sector assets are large; domestic savings are high and foreign debt exposures low; capital controls limit the risk of capital flight; and the government retains substantial levers to control economic and financial activity.”

That doesn’t mean there are no risks. On the contrary, as IMF economists noted in the teleconference for the report, to which I dialed in from my Shang Hai-Beijing train, the real estate sector is at the center of a web of interwoven vulnerabilities:  For one thing, the economy has relied too much on investment, especially in real estate...