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China's Debt Dilemma

September 18 , 2018

How much debt does China have, and could it cause a financial crisis? Can it cut down on debt without sacrificing its targets for economic growth ?

In recent years, economists around the world have warned of China’s surging debt-to-GDP ratio, which Forbes called “China's Debt Bomb.” But how much debt does China actually have, and could it cause a financial crisis?

Between 2007 and 2014, China’s total debt quadrupled. Estimates vary, but the International Monetary Fund puts China's total debt at 230% of gross domestic product (GDP.) China’s central government in 2017 estimated that it was around 260%. The U.S.’s debt, by comparison, is 105%, according to the U.S. bureau of public debt.

Where did China’s debt come from? Economists argue that China’s spectacular growth over the past few decades has led to rising credit and the rapid accumulation of debt. China’s debt buildup since the global financial crisis has been one of the largest in modern history. Nearly half of new debt since 2007 is in the property sector and related industries, with considerable debt held by China’s local governments, state-owned companies, and the “shadow banking” sector of unregulated non-bank lenders. However, unlike some advanced economies, such as the U.S., China’s household debt and total government debt are relatively low.

Last year, the ratings agency Moody’s downgraded China's credit rating, highlighting global concern over the amount of debt the world’s second-largest economy holds.

At last year’s 19th Party Congress, Chinese President Xi Jinping classified debt as one of the three major risks to the country’s stability. The government began a campaign to reduce corporate debt, tighten controls on local government spending, reign in unregulated non-bank lenders, and increase oversight in the banking sector. It also readjusted to prioritize quality of economic growth over quantity. Consequently, the pace of debt buildup during 2017 was much slower than in previous years.

China has taken measures to address its rapidly accumulating debt. But can it cut down on debt without sacrificing its targets for economic growth? That remains to be seen.

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