China's debt problem explained

Synopsis

China's total debt rose to a record high of 237 percent of gross domestic product in the first quarter. Economists express concern that this rising debt could lead to a financial crisis or a Japan-style loss decade characterized by slow growth. While China's debt remains below that of many wealthy economies like the US and Japan, it significantly exceeds the 175 percent average for emerging economies. The rapid accumulation of debt is particularly alarming, as history indicates that few economies have managed such a swift increase without facing a financial crisis or prolonged growth slowdown. Following the 2008 financial crisis, China implemented a massive credit-fueled stimulus, which accelerated debt growth even as GDP growth began to decline. The debt-to-GDP ratio is now measured against nominal GDP, which has been adversely affected by deflation in China's industrial sector. Economists warn that China risks entering a debt deflation spiral similar to that experienced by Japan or Greece, especially if austerity measures lead to further declines in nominal GDP.