Debt crisis in China - statistics & facts
Against the backdrop of a worsening real estate crisis and weakening economic situation in China, the debt situation of the country has increasingly cached attention recently. While some observers see China on the edge of a financial crisis, others are more relaxed and trust that the Chinese government has still enough options to handle the challenges.
What makes China’s case special is the fast pace at which debt accumulated during the past 15 years, doubling from 139 percent of GDP in 2008 to 294 percent in 2020. This is mainly due to the decision to boost the economy with high investments. After the global financial crisis of 2008, the government supported relaxed lending to corporates to restart the economy and allowed local governments to take up large sums of credit for infrastructure investment, often through shadow banking or untransparent local government financial vehicles (LGFV).
The efficiency of these investments, however, decreased over the years. Nowadays, apartments without owners, highways without cars, and airports without passengers can be found all over China. Corporate debt, which includes loans to state-owned companies and local governments, stood at a very high 158 percent of the GDP in 2022. The local government debt level, which is not officially reported, was estimated at roughly 30 to 35 percent of economic output in 2023, with LGFVs accounting for another 45 to 50 percent of GDP. Debt of the central government stood at a comparatively low and manageable level of around 77 percent of GDP in 2022.
In sectors with high debt exposure, especially the housing market, a severe crisis unfolded. Several real estate developers defaulted on their exorbitant high debt, starting with Evergrande in 2021 and proceeding with other market leaders such as Country Garden and Vanke. Construction starts nearly halved by floor area between 2020 and 2022 and dropped by another 23 percent in the first three quarters of 2023.
The Chinese government is facing the difficult task to deflate bubbles in the economy, which have been inflated by cheap credit, especially in the real estate sector, without letting things to get out of control and inducing a financial crisis. At least most parts of China’s debt are held domestically, which gives the government a greater leeway to manage the crisis. However, there is no way back to the huge financial stimuli employed after 2008. Transforming the economy to a more sustainable growth model will most probably be a painful but inevitable way.
The level of debt in China
Total non-financial debt in China reached 297 percent of the GDP in 2022. This is higher than in most other countries (advanced economies averaging at 267 percent), and exceeding the U.S. which was 256 percent. However, it is still lower than in some highly indebted but stable countries such as France and Japan with 334 and 415 percent respectively.What makes China’s case special is the fast pace at which debt accumulated during the past 15 years, doubling from 139 percent of GDP in 2008 to 294 percent in 2020. This is mainly due to the decision to boost the economy with high investments. After the global financial crisis of 2008, the government supported relaxed lending to corporates to restart the economy and allowed local governments to take up large sums of credit for infrastructure investment, often through shadow banking or untransparent local government financial vehicles (LGFV).
The efficiency of these investments, however, decreased over the years. Nowadays, apartments without owners, highways without cars, and airports without passengers can be found all over China. Corporate debt, which includes loans to state-owned companies and local governments, stood at a very high 158 percent of the GDP in 2022. The local government debt level, which is not officially reported, was estimated at roughly 30 to 35 percent of economic output in 2023, with LGFVs accounting for another 45 to 50 percent of GDP. Debt of the central government stood at a comparatively low and manageable level of around 77 percent of GDP in 2022.
Government steps to reduce debt
Faced with mounting debt and growing default risks, the Chinese government tried to tighten lending requirements early in 2013 and started a “deleveraging campaign” in 2016. These measures helped to control credit growth but had negative effects on economic performance. The economic downturn has been aggravated by the COVID-19 pandemic and its high costs, global economic headwinds, and low domestic consumption.In sectors with high debt exposure, especially the housing market, a severe crisis unfolded. Several real estate developers defaulted on their exorbitant high debt, starting with Evergrande in 2021 and proceeding with other market leaders such as Country Garden and Vanke. Construction starts nearly halved by floor area between 2020 and 2022 and dropped by another 23 percent in the first three quarters of 2023.
The Chinese government is facing the difficult task to deflate bubbles in the economy, which have been inflated by cheap credit, especially in the real estate sector, without letting things to get out of control and inducing a financial crisis. At least most parts of China’s debt are held domestically, which gives the government a greater leeway to manage the crisis. However, there is no way back to the huge financial stimuli employed after 2008. Transforming the economy to a more sustainable growth model will most probably be a painful but inevitable way.
