Of the many things that are worrying investors around the world, from tumbling oil prices to the spectre of recession and deflation in Europe, one of the most important, and least understood, is China’s debt. For the past few years China has been on a borrowing binge. Its total debt””the sum of government, corporate and household borrowings””has soared by 100% of GDP since 2008, and is now 250% of GDP; a little less than wealthy nations, but far higher than any other emerging market….
Since most financial crashes are preceded by a frantic rise in borrowing””think of Japan in the early 1990s, South Korea and other emerging economies in the late 1990s, and America and Britain in 2008””it seems reasonable to worry that China could be heading for a crash. All the more so because the nominal growth rate, the sum of real output and inflation, has tumbled, from an average of 15% a year in the 2000s to 8.5% now, and looks likely to fall further as inflation hit a five-year low of 1.6% in September. Slower nominal growth constrains the ability of debtors to pay their bills, making a debt crisis more likely.
Reasonable, but wrong. China has a big debt problem. But it is unlikely to cause a sudden crisis or blow up the world economy. That is because China, unlike most other countries, controls its banks and has the means to bail them out. Instead, the biggest risk is complacency: that China’s officials do too little to clean up the financial system, weighing down its economy for years with zombie firms and unpayable loans.
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(Economist) China's Debt risks zombifying the country’s financi
Of the many things that are worrying investors around the world, from tumbling oil prices to the spectre of recession and deflation in Europe, one of the most important, and least understood, is China’s debt. For the past few years China has been on a borrowing binge. Its total debt””the sum of government, corporate and household borrowings””has soared by 100% of GDP since 2008, and is now 250% of GDP; a little less than wealthy nations, but far higher than any other emerging market….
Since most financial crashes are preceded by a frantic rise in borrowing””think of Japan in the early 1990s, South Korea and other emerging economies in the late 1990s, and America and Britain in 2008””it seems reasonable to worry that China could be heading for a crash. All the more so because the nominal growth rate, the sum of real output and inflation, has tumbled, from an average of 15% a year in the 2000s to 8.5% now, and looks likely to fall further as inflation hit a five-year low of 1.6% in September. Slower nominal growth constrains the ability of debtors to pay their bills, making a debt crisis more likely.
Reasonable, but wrong. China has a big debt problem. But it is unlikely to cause a sudden crisis or blow up the world economy. That is because China, unlike most other countries, controls its banks and has the means to bail them out. Instead, the biggest risk is complacency: that China’s officials do too little to clean up the financial system, weighing down its economy for years with zombie firms and unpayable loans.
Read it all.