China’s Growing Debt Problem Isn’t Quite What It Seems

By Malcolm Scott Malcolm Scott and Cedric Sam Cedric Sam
August 24, 2016

China’s debt pile is huge and – more worryingly – growing fast. And credit isn’t delivering the same kind of economic boost it once did. But most debt is in local hands in a largely closed financial system, giving China’s leaders some breathing space to fix the mess. And that’s good for the global economy.

The debt landscape

China’s total debt is now about two and a half times the size of its economy. It takes almost a third of gross domestic product just to service it. Corporations are by far the biggest debtors, especially state-owned enterprises.

How that stacks up globally

While China’s total debt doesn’t look so scary when compared with economies such as those of the United States or Japan, it’s the speed of debt growth that has alarmed investors. Another worrying sign is that China isn’t getting quite the bang for its buck in raising its GDP, as shown by a flatter line for its debt growth against GDP per capita.

Debt level vs. economic advancement (2005 to 2015)

So who’s on the hook?

As with Japan, China’s debt is largely locally funded and is backed by a huge hoard of domestic deposits. That makes any Asian financial crisis-style blow-up unlikely.

Figures for 2015, except Japan (2014)

What about the assets?

Often overlooked, too, is the other side of the balance sheet: assets. China’s state companies – which are responsible for so much of the debt – also own assets that can be sold, with proceeds going to repay loans, if needed.

Households

332%

Corporate assets

552% of GDP

Foreign Exchange

39%

17%

Public Sector

Households

332%

Corporate assets

552% of GDP

39%

17%

Public Sector

Foreign Exchange

Corporate assets

552% of GDP

Households

332%

39%

17%

Foreign Exchange

Public Sector

Figures for 2013

The way forward

So, as leaders from the Group of 20 nations prepare to meet in Hangzhou to explore ways to boost a sluggish global economy, much will depend on whether China can tame its rampant credit growth and help create new growth drivers.