Does China Have a Debt Problem?

Some analysts fret that China will experience a “hard landing” in the not-too-distant future due to excessive debt in the Chinese economy. Our analysis shows that if China has a debt problem at present, it would be concentrated in the nonfinancial business sector where the debt-to-GDP ratio rose from 110 percent in 2006 to 140 percent last year. In contrast, debt in the household and central government sectors is low, at least when measured against their counterparts in the American economy.

Despite the increase in nonfinancial business debt over the past few years, there does not appear to be an extraordinary amount of financial strain within this sector at this time. In the industrial sector, interest rate expenses are very much under control and profitability does not appear to be eroding. The liabilities-to-asset ratio among real estate firms has edged up in recent years, so this sector may bear closer watching due to the deterioration in its capital buffer.

In general, it does not appear that there are flashing red lights at present indicating that the Chinese economy is on verge of the collapse due to excessive debt. However, there may be some yellow lights that are starting to blink on and off, and we believe that the debt situation in China, especially in the nonfinancial business sector, deserves close scrutiny. Our caution regarding the Chinese debt situation would become more elevated in the future if we see rapid credit growth in conjunction with slow economic growth.

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