China Research

After my recent article from December 19, 2024 on China’s huge private and public debt (https://blogg.lnu.se/china-research/?p=3606), some people asked me why financial markets and considerable parts of the press show such a limited interest in this potential threat to the Chinese and the global economy. The answer to this puzzle is not easy.

Five possible answers

In my view, there are five possible answers to the question above.

First, China’s enormous public and private debt is not regarded as a major threat outside China though it now totally may amount to more than 300 percent of GDP (https://www.caixinglobal.com/2024-01-27/chinas-debt-to-gdp-ratio-climbs-to-record-2878-in-2023-102161022.html).

Second, there may be a general belief that China will be able to tackle the debt problem successfully without getting confronted with distorting debt problems or – even worse – a bursting debt bubble.

Third, China still achieves surpluses in the balance on current account. This means that China by definition does not need to borrow money in foreign currency (though it happens for diversification reasons) – and that therefore pressure from worried foreign financial institutions can be kept down, probably also for the time being.

Fourth, because of China’s very limited (statistical) transparency, circulating debt numbers may be widely considered as unreliable and inappropriate to speculate and write about. Existing sectoral Chinese debt numbers are difficult to handle or even impossible to analyze.

Fifth, China’s debt problem still seems to be interpreted as a long-term issue whereas financial markets usually focus on short-term developments like the PMI or quarterly GDP despite their qualitative shortcomings. Thus, China’s debt challenge may be seen as too far away.

Summary: I would suggest that the first and the fifth alternative may be the most plausible ones – although the other options may serve as partial explanations as well. However, exclusively applying the second alternative could develop into a fatal malign neglect.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University