Chinese Debt: Should we be or not be scared?


Concerns over the Chinese debt-growth nexus appear to have subsided again, which is greatly helping the broader EM environment. China is somehow managing to grow at 6%+ rate (IMF forecast for this year has been revised up slightly t 6.7%), capital outflows, which have cost reserves dearly in 2015-16, have been curbed and the economic transition/transformation is sort of underway.

This Bloomberg article makes the point that debt is also less of an issue now because “[t]hanks to a combination of economic stimulus and state-owned enterprise reform, debt-to-equity ratios at China’s largest non-financial firms have dropped.” More broadly, in this interesting Project Syndicate column, Yu Yongding (a former president of the China Society of World Economics, among others) argues basically that “China is different”, i.e. thanks to its high saving rates and heavy government involvement in the economy (and the financial sector), “classic” crises scenarios do not quite apply to China. The country should focus on keeping its growth rate close to potential instead.

Others appear more skeptical and cautious. For instance, in its recent Article IV report, the IMF says sees that the fast increase in debt “raises concerns for a possible sharp decline in growth in the medium term” and that China should focus on quality and sustainability of growth, rather than numerical targets. (Here is 6 summary charts, here is the full report.) George Magnus, an associate at Oxford university’s China Centre, also sees the situation differently, arguing that it is a matter of time before various political and economic “discontinuities” put China back “in the cross-hairs of global markets again, sending the renminbi back down, and raising volatility in other financial asset and commodity markets.”

This is unlikely to happen before the much-anticipated Party Congress in mid October.  Depending on how things unfold therein, however, China may well be back to haunt markets again.