Casting a wider net over China’s total debt

Last month, we highlighted China’s debt as one of the key concerns around its economy in 2016. Debt levels have risen sharply since the Global Financial Crisis, particularly outside the traditional banking system – where the scale of borrowings is frequently under-estimated. This month, we’re digging a little deeper into the China’s debt, to provide a little more transparency around a very opaque picture.

Combining bank loans, shadow banking (excluding wealth management products (WMPs), government bonds and non-shadow banking aggregate financing provides us with a wider estimate of China’s total debt – which stood at 308% of GDP in December 2015. Given the exclusion of WMPs and newer products such as P2P loans (due to a lack of data), this estimate may err on the conservative side.

For some time it has been argued that the scale of China’s debt was less concerning that the rate of its growth, but this position now appears more difficult to argue – with our estimate of China’s debt above the average level of advanced economies (according to the Bank for International Settlements – 266% of GDP) – a highly unusual outcome for a still developing economy.

Chinese policy makers are facing a significant dilemma regarding the country’s debt. They can no longer afford to allow debt to grow unchecked – as this would increase the likelihood of a major financial crisis and the potential for a hard landing. On the other side, real economic growth is unlikely to be sustainable at the new five year plan target (6.5%) without growth in debt – bringing down the ratio would mean tolerating a considerably lower potential rate for economic growth (something that policy makers are unlikely to tolerate).

For more details, please see attached document:

•  China Economic update:  March 2016 (PDF, 159kb)