Beijing’s desire to pump up the Chinese economy is leading it into dangerous territory.
Although China has piled on debt, the country has been relatively cautious about one of the big areas that led to the U.S. financial crisis: leverage. It was the slicing and dicing of mortgages into digestible bite-sized chunks called derivatives that was a key contributor to the U.S. financial meltdown in 2007. Once they unwound, they threatened the banking system itself.
Until recently, China has avoided complicated derivatives and other forms of leverage. However, desperate to keep the economy from slumping, the Chinese reluctance to wander down the leverage path seems to have faded.
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