China’s Debt Spiral: An Economic Powerhouse on the Brink of Transformation. Photographer: Tomohiro Ohsumi/Bloomberg via Getty Images
EPICSTORIAN – Though China’s external debt has risen sharply in recent decades, the country has emerged as a critical player in the global economy, driving not only innovation and manufacturing but also playing an integral role in global debt trends.
China’s current outstanding external debt stands at $2.51 trillion as of March 2024, with subnational (local government) debt amounting to an estimated $6.5 trillion, which represents 38% of global subnational debt.
A Closer Look at China’s external Debt and private debt Trajectory
The private sector has been the dominant force in China’s debt expansion, with its debt tripling since 1950. After the 2008 Global Financial Crisis (GFC), China’s economy underwent rapid credit expansion, largely contributing to global private debt, IMF Data.
By 2016, private debt in China had surged to 120% of its GDP, accounting for nearly three-quarters of the global private debt increase.
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In addition to private sector borrowing, public debt has risen sharply. Local government financing vehicles (LGFVs) in China have been extensively used to fund infrastructure and other public projects.
However, this has pushed many municipalities toward unsustainable debt levels. LGFVs currently face significant repayment risks, particularly as the Chinese government tightens regulations on shadow banking.
The Global Debt
Globally, debt ratios have surged continuously since World War II, with emerging markets gaining prominence post-Global Financial Crisis (GFC), data from the International Monetary Fund (IMF) revealed.
Historically, advanced economies led global debt growth; however, since 2009, emerging markets, particularly China, have dominated. Despite these developments, a significant gap remains between advanced and emerging economies, with the former’s debt levels averaging over 90% of GDP.
Meanwhile, low-income countries represent less than 1% of global debt, highlighting stark disparities in financial depth.
China’s Economy
China’s economic success has been underpinned by its role as the “world’s factory,” contributing over 18% to global GDP. Yet, this growth has not come without challenges.
A property market crisis, a struggling export sector, and slowing domestic consumption are compounding the country’s debt vulnerabilities. Moreover, geopolitical tensions and a post-pandemic global slowdown have added to the pressure on Beijing’s economic policies.
China’s reliance on credit-fueled growth has created systemic risks. Although local government debt has financed infrastructure that supports long-term economic growth, mismanagement has led to fiscal imbalances. For instance, some regions are unable to service their debts, and defaults are becoming more common.
Outlook and Implication
Economists argue that China’s debt burden is sustainable for now, thanks to its large foreign exchange reserves and a predominantly domestic debt structure. However, a significant portion of local government debt is tied to unprofitable investments, raising concerns about long-term fiscal stability.
China remains Global Epicenter of Private Debt Growth
China has emerged as a central player in global debt dynamics. Since the early 2000s, its private sector debt has grown exponentially, driving nearly three-quarters of the global increase in private debt.
By 2016, China’s private debt soared to 120% of GDP, reflecting rapid credit expansion. Analysts attribute this to aggressive industrialization policies, a booming real estate market, and a state-backed push for infrastructure development.
“China’s credit growth has been both a blessing and a burden,” noted a Beijing-based financial analyst. While fueling economic growth, it has also left China exposed to significant financial risks, with non-performing loans and corporate insolvencies on the rise.
Public Debt: A Balancing Act
Although private debt has been the primary driver of China’s economic expansion, public debt also poses challenges. Public borrowing increased significantly after 2008, as the government initiated large-scale stimulus measures to counter the GFC’s effects.
By 2024, China’s public debt was approaching 80% of GDP. Factors such as falling commodity prices, slowing economic growth, and aging demographics have exacerbated fiscal pressures.
“Managing public debt while sustaining growth is our primary challenge,” acknowledged a Chinese government official. Recent efforts include limiting shadow banking activities and tightening regulations on local government financing vehicles.
Global Implications of China’s Debt-Fueled Growth
China’s debt trajectory has broader implications for global financial stability. The country’s massive borrowing has contributed to the Asia-Pacific region becoming the world’s most indebted region since the GFC, overtaking North America. While this growth underpins China’s role as a global economic powerhouse, it raises concerns about financial contagion.
Implications for Global Markets
Should China’s credit bubble burst, the ripple effects could destabilize global markets, given its interconnectedness with international supply chains and trade networks, according to experts.
The International Monetary Fund (IMF) has urged China to strike a balance between growth and financial stability, warning of systemic risks posed by excessive leverage.
