Whenever the Chinese economy slows and its stocks take a serious hit, investors have come to expect the government to unleash large-scale fiscal and monetary stimulus. Another heaping spoonful of sugar may do more harm than good this time around, however. It’s time for the ailing market to take some medicine.

The MSCI China A Index has tumbled by more than 26% through November 23 on concerns about a weakening domestic economy and the escalating trade war with the US. Many investors who were attracted to the opening of the Chinese domestic market earlier this year are now watching for signs of a bottom.

This is the point at which the government would normally administer a generous shot of domestic stimulus, as it did in 2008 and 2015. If the government pumped enough money into the economy, it could help offset the pain from higher tariffs, buoy the domestic economy and lift stocks out of the doldrums. But stimulus also has its dangers, particularly when it’s used as a tool to manage markets.

The Debt Discount

Ask investors and economists alike what worries them most about China, and debt levels would inevitably be at the top of the list. China’s ratio of corporate debt to GDP is 164%, the fifth-highest among the 44 countries tracked by the Bank of International Settlements. Its corporate debt ratio has grown more in percentage terms than that of all but eight other countries since 2013.

Who’s to blame for this heavy debt burden? Past stimulus packages are partly responsible. In addition to funding massive infrastructure projects, these packages usually involve lowering interest rates, reducing bank reserve requirements and something called “window guidance,” in which the central bank essentially telegraphs which industries they would like banks to lend to.

Private companies and even individuals have taken full advantage of loose credit conditions. Rising corporate bond defaults and nonperforming loans, as well as the recent collapse of hundreds of peer-to-peer lending platforms, suggest that at least in some cases, the money came too easily. Concerned global equities investors are already applying a substantial discount to Chinese stocks because of debt issues. Another borrowing binge won’t help that situation, in our view.