China Debt Rises to 226 Percent of Annual GDP

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BEIJING – Liu Shiyu, Deputy Governor of the People’s Bank of China, warned yesterday of the continuing perils of shadow banking and urged further efforts to control China’s rising debt. Commenting that China’s shadow banking sector was created using a “gambling mind set” directed only at short-term investments, he stated that the practice is pushing up costs for the real economy while making zero contributions to labor productivity.

As the Chinese economy slows down, the nation’s shadow banking industry—estimated by J.P. Morgan at US$7.5 trillion—is making it harder for the government to rein in credit and protect state-owned banks from default. The State Council also warned yesterday that China’s capital markets remain immature, containing organizational and systematic problems.

Recently, the Chinese Banking Regulatory Commission (CBRC) has stepped up supervision of the trust industry by tightening the approval process for financial companies seeking to enter new business fields and offer new financial products. It has also instructed smaller banks to limit their investments in assets that are not trading on exchanges using proprietary or interbank funds. Lastly, practices such as moving interbank lending off bank balance sheets are now banned.

Last year, China’s total gross debt, including government, corporate and household debt, was about 226 percent of its total annual GDP according to Credit Agricole, and this is expected to rise to 265 percent by 2016. This compares with a ratio of 105 percent in 2000 and 187 percent in 2012. These numbers have triggered concern over their similarities to the debt surges that pre-empted the Asian Financial Crisis in 1997.

The ratio of a country’s national debt to its gross domestic product (GDP) is an important measure of its creditworthiness, though not the only means to do so. By comparing what a country owes to what it produces, the debt-to-GDP ratio describes the given country’s ability to repay its debt. This can be written as a percentage—a ratio that expresses the number of years needed to pay back the debt if GDP was dedicated entirely to debt repayment.

Economists have yet to agree on an ideal debt-to-GDP ratio, but instead speak in terms of the sustainability of specific debt levels. A stable level is defined as one at which a country can continue to pay the interest on its debt without needing to refinance or otherwise impair its prospects for economic growth. Higher debt-to-GDP ratios create problems for a country’s ability to pay its external debts, and may result in higher interest rates from creditors. As this ratio rises and a country is increasingly unable to repay its debt, the risk of default looms larger and larger, which is likely to panic domestic and international markets.

Another way of looking at China’s economic position is through its recent overtaking of the United States in terms of economic size by purchasing power parity (PPP). While that may well be true, China has borrowed 2.5 times more money than the U.S. to achieve this position—and is also nearly double that of the Japanese debt ratio, now the world’s fourth largest economy.

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4 thoughts on “China Debt Rises to 226 Percent of Annual GDP

    With all due respects to global economists, and given the tendency of the Chinese to produce GDP figures themselves which are probably inflated – it seems to me we are getting into some seriously uncharted territory here as concerns Chinese debt levels. Maybe someone would care to comment on the potential implications?

    Research Analyst SW1 says:

    First of all some love: I love China Briefing, I really do. Far and away the best source of China biz intellect, law and tax dry info with interesting opinion pieces – and then in your face stuff like this. You never know what you’re going to get here from one day to the next, and you are brilliant because of that.
    Now some facts: I don’t know where you got this data from. No-one else has picked this up. But if true you are brutal in your approach. And again, if true, and as the wise old China hand CDE said above “this is uncharted territory”. I have no idea what to think about this except to say it seems as scary as hell to me.
    But whatever you guys do there – keep it up. Whether you are right or you are wrong, we need to know this sh8t and thanks for not being sanctimonious about it or covering it with economic b/s.
    That’s the best I can say. You guys rock. “Uncharted territory” sums it up.

    Peter Chu says:

    This story was also reported in Singapore, I suspect the Chinese kept it quiet in their domestic media. I am sure some analysts will produce something the next week or two in more detail after this piece. I think when the State Council says “China’s capital markets remain immature, containing organizational and systematic problems.” it is time to be a bit concerned. Although the academic economic jury seems out on what that total debt level actually implies. “Uncharted Territory” sums it up well.

    Nicholas says:

    Editorial note: Please note that the China GDP debt level mentioned in this article is total debt, including government, corporate and household debt. This is not to be confused with the Chinese government debt-to-GDP ratio, also commonly quoted in international media, and which is lower.

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