Over-indebted China: an altogether measured risk

18th June 2018
-IAM, News

Hugues Chevalier, Economist

The total debt of the Chinese economy continues to grow steadily and represented at the beginning of the year more than 260% of GDP. That is why the International Monetary Fund (IMF) warned the Chinese authorities about rising risks linked to indebtedness. The rating agency Standard and Poor’s (S&P) downgraded Chinese government bonds from AA- to A+, highlighting the deterioration of the financial stability. In reality, the debt is so large, that any other emerging markets country would already have experienced a severe currency crisis.

However, despite the staggering level of debt, the risks remain controlled for four main reasons. First no slowdown in economic growth is to be expected in the medium term, suggesting that the debt ratio could remain stable, or even reduce. Furthermore domestic savings remain in surplus: China does not borrow from abroad, which relatives the risk. Then should interest rates not rise suddenly, as the monetary authorities control capital flows and while inflation remains weak. Finally, the economic transition should increase the profitability of companies and as a result reduce the risk on debt.