China’s economic landscape is currently overshadowed by a significant debt problem that could potentially trigger a financial crisis. The country’s debt-to-GDP ratio has doubled over the past 15 years, reaching a staggering 280%. This debt burden is largely held by local government financial vehicles, which are now seen as a ticking time bomb.
China’s property developers are under duress, and with a faltering economy and diminished confidence among households and companies, the ingredients for a broader financial crisis seem to be in place. The situation is further complicated by the fact that bad debts on bank books have been rising steadily as borrowers struggle to repay their loans.
Despite these alarming indicators, some experts argue that the risk of a hard landing is low. They point to China’s low overseas debt, high national savings rate, and the fact that most of the debt is state-owned, which gives the government the ability to manage the situation.
However, the rapid increase in debt, more than doubling compared to the size of its economy since the global financial crisis 15 years ago, makes managing it harder. This is particularly true when considering that China is also a major lender abroad, with nearly $1 trillion lent to some 150 developing countries.
The state-controlled banking system is wary of accepting losses on foreign loans when it faces far greater losses on loans within China. This reluctance is further fueled by periodic complaints on Chinese social media that banks should have lent the money to poor households and regions at home, not abroad.
What is the debt-to-GDP ratio?
The debt-to-GDP ratio is a measure that compares a country’s public debt to its gross domestic product (GDP). A high debt-to-GDP ratio may indicate that a country has an excessive debt load and may struggle to pay off its debts.
What is a financial crisis?
A financial crisis is a situation where the value of financial institutions or assets drops rapidly. It is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts because they fear that the value of those assets will drop if they remain in a financial institution.
What does it mean when a country is a ‘major lender abroad’?
When a country is referred to as a ‘major lender abroad’, it means that the country has lent significant amounts of money to other countries. This is often done through international aid programs or to finance trade deficits.
What are ‘state-owned’ debts?
‘State-owned’ debts refer to debts that are owned by the government. In the context of China, this refers to the fact that most of the debt is owned by state-controlled banks, which have loaned funds to state-controlled firms. This gives the government the ability to manage the situation.
What is a ‘hard landing’?
A ‘hard landing’ in economic terms refers to a rapid slowdown in economic growth. It typically happens when an economy is growing at an unsustainable rate and then suddenly slows down or even contracts. This can be caused by government attempts to rein in inflation or other economic imbalances.