For an emerging economy, China's corporate and household debts have become very large

"Coaster through the Clouds" in Nanchang, a city in the southern province of Jiangxi, is China's tallest and fastest roller coaster. It carries terrified customers up to heights of 255 feet and down again at speeds reaching 80 mph. The ride towers above an amusement park built by Dalian Wanda, a Chinese property-and-entertainment conglomerate, which has aspired to outdo Disney's resort in Shanghai.

But this month, the group said it was selling 13 such projects and 77 hotels to rival developers. It would use the proceeds, its owner said, to repay loans.

Last month, China's regulator asked banks to provide more details about their overseas loans to Wanda. Standard & Poor's said it would reassess the group's credit rating, noting that the abrupt sale of assets had raised questions about Wanda's strategy and finances.

Wanda is the most prominent of China's highly leveraged companies, of which there are many. Corporate liabilities, including those of state-owned enterprises, amounted to 166 percent of GDP at the end of 2016, according to a measure by the Bank for International Settlements. Add in rapidly growing household debt and the total was over 210 percent, unusually high for an emerging economy.

Some of the increase in credit may be a welcome result of better access to it. Economists expect credit to grow as a share of GDP as a country develops, but when loan making quickens, opening up a gap between the prior trend and actual levels, they begin to get scared. A credit gap above 10 percent of GDP has presaged financial distress in the past, the BIS said. Last year it reported that China's gap had reached about 30 percent of GDP, the highest in the world. Credit was lost in the clouds.

'Supervisory tightening'

Since then the authorities have shown greater determination to curb financial risks. The People's Bank of China, the country's central bank, allowed the interest rate at which banks lend to each other to rise. And China's financial regulators have carried out "supervisory tightening," said economist Tao Wang of UBS, fleshing out existing rules and enforcing them more tightly.

On July 14 and 15, China's regulators, including the central bank, came together for a five-yearly "financial work conference." They created a new cabinet-level committee to beef up their efforts. Just as importantly, Xi Jinping, China's president, gave a speech at the meeting that was tough enough on the topic of credit-tightening to send stocks tumbling the next day.

On a roller coaster, riders climb upward slowly, their suspense building, then plunge downward quickly, their stomachs lagging a little behind. In its deleveraging efforts, China's government hopes to do the opposite. It has allowed the country's liabilities to mount quickly. Now it wants them to plateau or drop gently (relative to the size of China's economy), leaving stomachs unchurned.

Some think this will be impossible. China's growth is increasingly dependent on credit, they argue. Therefore if credit slows, China's growth must falter. But recent data suggest the relationship between credit and growth is far from mechanical. Although lending growth has slowed, China's nominal GDP growth has quickened: it grew by more than 11 percent in the first half of 2017, compared with the same period a year earlier. In the second half of 2015 nominal growth was just 6.5 percent.

That combination of slowing credit, quickening growth and rising inflation has already had a notable effect on China's debt ratios.

The official measure of broad credit (often called "total social financing") declined slightly, as a percentage of GDP, in the second quarter. And the frightening credit gap has narrowed dramatically. From its peak of around 30 percent of GDP last year, it has fallen to only 19 percent at the end of June 2017, by the Economist's reckoning.

Carried by the government

Churls will point out that these credit totals leave out explicit government debt. China's ministry of finance has propped up growth through fiscal easing and replaced some bank lending with local-government bonds.

But local-bond issuance has declined considerably in recent quarters. And the debt burden will be much safer if it is carried by the government, which has the power to tax and print money, rather than by individual companies.

Skeptics will point out correctly that China's tightening is still new. It may be too soon to see its full impact on growth. But although the stock of credit has declined (as a percentage of GDP) only in the most recent quarter, the flow of credit has been shrinking year-on-year for longer, according to the BIS measure. It is the expansion or contraction of this credit flow, not a rise or fall in the stock, that should affect GDP growth.

At the recent conference, Xi urged lenders to serve the "real" economy rather than make speculative deals. That would help credit to contribute more directly to GDP.

Roller coasters rise and fall but usually end up back where they began. Credit, on the other hand, should be a vehicle of economic progress, not a circular thrill ride.