According to the International Monetary Fund Global Debt Monitor, as of 2022,

China's total debt as a percentage of its GDP has risen to a massive 272%.

That is an increase from a mere small debt of just 71.3% back in the 1980s.

As you can see in the graph here, China's total debt has been rising every decade and every year.

This was driven by a combination of aggressive economic policies, rapid urbanisation and heavy investment in infrastructure, all of which required significant borrowing.

This is why when you see videos, footage, photos of China, you see an immense difference from where it was 30, 20 or even 10 years ago.

The country has continuously changed and continuously invests in future projects.

Furthermore, if we compare this data for other countries, like Japan, the United Kingdom, the United States, the Euro area and other regions, we see this.

China's total debt as a percentage of GDP is truly high.

Having a high debt, even compared to countries like the US and UK, is quite extraordinary because China is still considered an emerging economy, while countries like the US, UK and Japan are advanced, mature economies with extensive financial systems and established debt management mechanisms.

The fact that China's debt levels have reached comparable or even higher levels than these countries raises concerns about sustainability and risk, especially considering that China's economic growth, while still strong, has been gradually slowing down.

So, is China's debt going to cause a massive headache for the government?

Will it actually cause an economic slowdown or worse, a deep stagnation like that of Japan?

Well, the answer is obviously difficult to say.

For one, the economic structure of China and Japan are both different.

Japan's economy has long been developed, with a mature industrial base, slower population growth and an ageing demographic.

This made it vulnerable to stagnation when growth slowed in the 1990s.

China, however, is still transitioning from a developing to a developed economy, and its demographics, though ageing, are not as advanced in this shift as Japan's were during their period of economic struggle.

Additionally, China's financial system operates under a unique set of centralised controls that allow the government more influence over its banking sector and credit policies, which could enable China to manage its debt in ways other countries may not.

But before we understand whether this is manageable or not, let's first understand what a country's total debt is.

The total debt from the IMF is divided into two categories – public and private debt.

Public debt, as defined by the IMF, is the gross debt owed by the general and or central government.

This includes obligations that the government has taken on, usually through bonds or loans, to finance spending on infrastructure, social programmes or economic stimulus efforts.

Private debt, on the other hand, is the debt owed by non-government entities, primarily businesses and households.

In China, private debt is a substantial portion of the total debt, largely driven by corporations, particularly state-owned enterprises, and an expanding household debt sector.

Private debt includes all liabilities incurred by private businesses to fund their operations, expansions or acquisitions, as well as personal borrowing by individuals for mortgages, credit cards and other consumer loans.

Now, the public debt of China isn't a lot.

You know that data set that many people look at – Japan's massive public debt, which reaches more than 260%?

This data has always been blamed for Japan's slowing economy, and is indeed a key reason why the country is having a hard time.

The US, on the other hand, has also been battling with rising public debt.

Its government has been in a fiscal deficit for more than two decades.

They have been spending more than what they make.

The COVID-19 pandemic has also incurred rapid increase in government spending, which caused the debt to balloon.

This is why the US's public debt to GDP now reached over 121% for 2022.

China, on the other hand, isn't really in a bad position as compared to these major economies.

As a matter of fact, China's public debt to GDP is actually lower than some emerging economies.

Take, for instance, India.

India's economy is nowhere near that of China.

And, as a developing nation, its debt must be lower, right?

Well, India's debt to GDP is actually higher than that of China.

Even other developing countries across Southeast Asia nearly have a similar debt to GDP levels to that of China.

Take Thailand, Malaysia, and the Philippines.

These three have around 60% debt to GDP levels, with Malaysia the highest, and the Philippines the lowest.

Yet, China maintains a public debt to GDP ratio that is relatively modest, especially when considering its vast economy and its role as the world's second-largest economic power.

Then we also have private debt.

Private debt, as we just mentioned, is the debt owned by the private sector.

These can be companies like Alibaba, Tencent, or state-owned enterprises like PetroChina and China Mobile.

Here's the graph of China's private debt.

It seems a lot, doesn't it?

The rate of increase since 2010 is also quite overwhelming.

Further, it is more than double than that of the government debt, which should imply that China's private debt is too much.

Well, one can say that it is a lot, but it's quite comparable to some Asian nations like Thailand, South Korea, and Japan.

Even compared to some European nations, China's private debt isn't that high.

Just take a look at Sweden's private debt.

It's much more than that of China.

France's private debt is also up there at over 228% of their GDP.

Now, determining whether a country's debt is a problem is quite difficult to say.

Debt is a double-edged tool.

If used properly, it can drive economic growth for the better.

But if used recklessly, it can do the exact opposite.

So that is what we must determine for China.

Is China recklessly borrowing money?

Well, let's understand the big factors that led to China's debt accumulation.

The first reason is because of urbanisation.

As China's economy transitioned from an agrarian society to an industrial powerhouse, this necessitated big investments in infrastructure.

To finance big infrastructure plans, however, required a lot of money.

The government then had to borrow money through substantial borrowings to make these happen.

Another reason for the accumulation was due to local government financing vehicles – LGFVs.

To circumvent borrowing restrictions, local governments established LGFVs to fund infrastructure projects.

These entities allowed for off-balance-sheet borrowing, meaning that debt was not always visible on government financial statements.

Unfortunately, some estimates suggest that by the end of 2024, hidden local government debt could reach nearly 55% of GDP, potentially escalating to almost 150% by 2029.

Finally, a major cause for the rise is no other than the real estate sector.

The property market has been a significant driver of debt, with developers and local governments borrowing extensively to finance construction projects.

This is one of the big problems that China has had as of late.

They had too many real estate projects, with no one occupying them, a lot of which were borrowed extensively.

With no expected investment return, China then had to face its own real estate crisis.

Just take a look at the stock performance of many Chinese real estate companies.

It's not a pretty picture to see, especially knowing that China's economy depends a lot on its real estate sector.

So, knowing these, how bad is China's debt?

Well, for one, China's corporate debt may be a big problem.

According to S&P Global, China's corporate debt reached approximately $29 trillion by early 2022, nearly the equivalent of the entire US government debt.

Another problem is that debt issues stem from deep-seated structural and policy choices that prioritise rapid growth and development over financial sustainability.

Much of the country's debt is held by state-owned enterprises, which have borrowed extensively to fund projects in infrastructure, energy and heavy industry.

These sectors are integral to China's economic strategy, but they do not always generate returns that match the scale of investment.

Of course, the Chinese government is not oblivious to the risks posed by these debts.

That is why, in recent years, they have been trying to change these.

But there's still a long way to go before they actually succeed.

But anyway, do let us know what you think.

Thanks for watching.