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Is the Chinese economy too indebted to sustain growth in the long term?

Frederic Roycroft

According to recent data, the Chinese economy is indeed highly indebted and this fact has raised concerns among economists and policymakers about its ability to sustain long-term growth. The total debt-to-GDP ratio in China has risen from 141% in 2008 to 264% in 2019, and it continues to increase at a rapid pace.

The high level of debt in China can be attributed to several factors. Firstly, China’s growth model is heavily reliant on debt-financed investment, particularly in infrastructure and real estate. Secondly, the State-owned enterprises (SOEs) in China have been given preferential access to credit, which has resulted in their over-investment and inefficiency. Thirdly, China's aging population has put pressure on its social welfare system, resulting in an increase in government debt.

While indebtedness is a cause for concern, it should be noted that not all debt is created equal. In China's case, the majority of the debt is domestically financed, which means that the risk of a sudden capital outflow or a currency depreciation is low. Additionally, China has a large pool of domestic savings and a well-managed banking system, which reduces the risk of a financial crisis.

Moreover, the Chinese government has taken several steps to address the issue of rising debt. It has implemented a series of reforms aimed at reducing the role of SOEs, controlling local government borrowing, and promoting private investment. Additionally, the government has tightened regulations on the shadow banking sector, which was a major source of risky lending in the past.

China's high debt levels pose a challenge to its long-term growth, but it is not an insurmountable obstacle. China's policymakers have recognized the problem and taken important steps to address it. With the right policies, China can manage its debt levels and continue to sustain strong economic growth in the long run.

In conclusion, the Chinese economy is indeed highly indebted, but the risk of a sudden crisis is low due to the domestic nature of debt. Furthermore, policy reforms and regulations aimed at addressing the issue of rising debt have been implemented by the government. While there are challenges ahead, China is well-positioned to manage its debt levels and continue to sustain strong economic growth in the long term.