Chinese government debt rose by over 13 percent last year, making it almost three times the size of the country’s gross domestic product.
The steady increase in government borrowing comes at a difficult time for the Chinese real estate sector and as economic growth is slowing, causing concern among international markets and investors. On Monday, property developer Evergrande, the poster company for China’s real estate crisis, was ordered to liquidate and compensate debtors and bondholders after failing to arrive at a plan to restructure its over $300 billion in debt.
A report published last week by state-backed Chinese think tank the National Institution for Finance and Development (NIFD) stressed the urgency of shoring up China’s economy to limit the potential impact of ballooning debt. The report followed China’s lowest annual GDP growth figures, not adjusted for inflation, in three decades.
“China’s total debt to GDP ratio is almost 300 percent. And Evergrande is the single most indebted company in the world. Real estate accounts for about 20 percent of China’s GDP, and the real estate sector in China is crashing. If it goes, it will take the banks with it,” American economist Antonio Graceffo wrote on social media.
AFP
China’s macro leverage ratio, or total outstanding non-financial debt as a share of its nominal GDP, climbed by over $560 billion to reach 287.8 percent last year, more than twice the roughly 120 percent of its economic rival the U.S. The new data would put China ahead of Japan, previously the world’s most indebted country, whose sovereign debt accounted for about 220 percent of its GDP by the second quarter of 2023.
St. Louis Federal Reserve Bank senior economist Miguel Faria said in a 2020 interview that the risk of problems largely comes down to the perceived strength of a country’s institutions.
The major Western economies and Japan, he pointed out, generally have strong financial institutions and independent central banks. “As a consequence, these countries can typically sustain very high levels of debt to GDP” because lenders can expect to be repaid.
Chinese banks, meanwhile, lack this independence as they are compelled to carry out the directives of the Chinese Communist Party’s Central Financial Commission.
The authors of the NIFD report predicted China’s macro leverage trend would continue through 2024 and that the key to offsetting it is economic growth, as measured by nominal GDP.
“The nominal GDP target allows inflation to change in the short term, thereby smoothing the business cycle. It fundamentally prevents the impact of demand shocks on the economy, and also reduces the instability caused by supply shocks,” they wrote.
Annual nominal GDP growth fell to 4.6 percent last year, according to the report.
However, even if nominal GDP growth manages to hit 5 percent by the end of 2024, the leverage will exceed 300 percent of China’s GDP, the report warned.
To maximize growth this year, the authors underscored the importance of short-term “steady progress.” They urged sound regulatory policies, innovation, and the coordination of policy tools.
In addition, finance should be directed to initiatives such as the construction of affordable housing and public infrastructure to “make up for the real estate investment gap and increase infrastructure investment.”
Newsweek reached out to the NIFD with a written request for comment.
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.