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Is China's growing debt burden a crisis in the making?

The story begins in 2009, when China launched a $600 billion economic stimulus program during the global financial crisis. It unleashed a wave of borrowing by state firms that is proving to be a burden today.

twitter-logo Reuters        Last Updated: December 29, 2016  | 15:10 IST
Is China’s growing debt burden a crisis in the making?

The story begins in 2009, when China launched a $600 billion economic stimulus program during the global financial crisis. It unleashed a wave of borrowing by state firms that is proving to be a burden today.

China's debt this year reached more than 250 per cent of GDP, much of it accumulated by state-owned enterprises given the task of borrowing to fund infrastructure projects to fuel demand. As China's economy earlier this year threatened to miss the 2016 growth target of 6.5-7.0 per cent, the government once again encouraged stimulus spending and more borrowing.

Some economists argue other countries that accumulated debt as rapidly as China have ended up facing a financial crash soon afterwards. Indeed, the Bank for International Settlements says China's banking sector could face a crisis within three years.

Household debt has reached a record high of more than 40 per cent of GDP this year. While not large compared with many other countries, rising household debt, fueled this year by a property boom, could eventually take a big bite out of consumer demand.

The big concern is corporate debt, which largely thanks to borrowing by state firms, has soared to 169 per cent of GDP. As China's economic growth slows, these companies' profits are sliding, leaving them less financial room to service and pay off their debts.  Some economists, though, are less worried about China's debt load. Not only does China have massive household savings of around 50 per cent of GDP, most debt is state owned and domestically held.

 

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