How bad is Chinese debt really?

by on July 22, 2014 at 2:49 am in Current Affairs, Economics | Permalink

China’s total debt load has climbed to more than two and a half times the size of its economy, underscoring the difficult challenge facing Beijing as it seeks to spur growth without sowing the seeds of a financial crisis.

The total debt-to-gross domestic product ratio in the world’s second-largest economy reached 251 per cent at the end of June, up from just 147 per cent at the end of 2008, according to a new estimate from Standard Chartered bank.

Such a rapid build-up is far more of a concern than the absolute level of debt, since increases of that magnitude in such a short period have almost always been followed by financial turmoil in other economies.

While calculations of the ratio vary depending on exactly what types of credit are included, several other economists agreed with the new figure. Even those with slightly different calculations said the general trend was clear.

…“China’s current level of debt is already very high by emerging markets standards and the few economies with higher debt ratios are all high-income ones,” said Chen Long, China economist at Gavekal Dragonomics, a research advisory. “In other words China has become indebted before it has become rich.”

The U.S. total debt-to-gdp ratio is now about 260 percent.  From the FT, there is more here.

I also would like to see an estimate of the Chinese wealth-to-income ratio, relative to the U.S. ratio.  I would expect a higher ratio for the United States, which would militate in favor of greater sustainability for American debt, but of course that is why we wish to have the actual numbers.

1 andrew' July 22, 2014 at 3:24 am

China still has growth potential relative to the US and so far they are still investing for return. We know where they will end up (some type of par). We just don’t know how long it will take and how bumpy the ride.

As for the US, having your collateral collected isn’t usually a comforting thought, especially if that collateral is what provides the revenues.

2 louis July 22, 2014 at 9:40 am

The issue isn’t one of collateral being collected, its a measure of valuation. If people value a company’s assets at $1 bn (because that is the discounted value of expected future cash flows), it is usually perfectly fine for them borrow 40, 50% of the value against the asset. Not great to borrow 80-90%.

3 Brian Donohue July 22, 2014 at 9:58 am

Yeah, that’s what I was thinking. A ‘life cycle’ approach puts China as ‘young’ compared to the US right now. And just like young people, young countries tend to borrow against future growth.

OTOH, China is aging fast. They are in a unique demographic situation where they need to get rich before they get old.

On the third hand, they’re saving like crazy too. I think China will be ok.

4 Boonton July 22, 2014 at 10:41 am

Savings is the other side of the coin of debt. If China’s saving a lot, someone must be borrowing a lot, if China’s borrowing a lot, someone’s saving a lot.

5 J July 22, 2014 at 11:00 am

I think you might need medical attention, sir.

6 J July 22, 2014 at 11:00 am

That was such a #DadJoke but I couldn’t resist.

7 Pete Harvard July 22, 2014 at 3:50 am

This total debt to GDP… that includes all debt, private and public? What’s the US govt debt to GDP number vs. China’s?

8 Ray Lopez, provocateur July 22, 2014 at 4:36 am

Google is your friend, as is Bing:

for the US: 62T/17T = 364%, but as TC notes the US is a more mature economy, and as Ashok Rao points out, the USA actually earns more from foreigners than vice versa (though this ignores the calamitous effects in the interest rate premium that would occur if the dollar was to collapse, see, from Rao’s blog: “Another overlooked consideration is that the United States is somewhat unique. Despite a large current account deficit and soaring obligations, we earn more in foreign income than foreigners earn here. And in fact, the ratio of GNP/GDP has only been increasing. This derives from a large long position by (rich) American investors in emerging markets. To the extent the the dollar is debased (something Krugman suggests the rich are very worried about), the US claim on the rest of the world’s future income increases. (And, conversely, foreign reserves across the world would plummet).”)

9 ummm July 22, 2014 at 4:41 am

Just another example of how the US is exceptional: we can spend as much as we life without any bond based inflation that smaller countries would be subjected to.

10 Boonton July 22, 2014 at 10:58 am

So ‘total debt to gdp’ including all types of debt from gov’t debt to your little credit card debt. What should that be? Less than 100% implies that a productive asset should be able to pay for itself with less than a year’s worth of income.

Does that make sense? If you’re, say, a landscapper should the profit on new equipment have to produce it’s purchase value in less than a year? If you build an apartment building, should the rents pay for the entire construction in less than a year? That implies to me that you think your assets do not have a very long useful life.

But what if your assets have a very long useful life? In that case you’d borrow much more than their yearly income. Since GDP is just the sum of the income of everyone and everything in the economy that implies ‘total debt’ should be larger than GDP unless you either expect the world to end in less than a year or you think everything in the economy is going to wear out in less than a year.

11 Cloud July 22, 2014 at 3:59 am

The thing is, earlier this month, the Economist just quoted that the debt to GDP ratio in China is 200%. The thing is really confusing

12 andrew' July 22, 2014 at 4:17 am

Especially if there is a tipping point. The Reinhardt and Rogoff kerfuffle mostly suggested that the tipping point is sneaky, which is scarier than knowing exactly where it is.

13 Roland Dobbins July 22, 2014 at 5:10 am

It’s confusing because you can’t trust the official numbers from the Chinese governments, so you have to estimate – and there are different ways of making estimations.

14 dearieme July 22, 2014 at 5:50 am

“there are different ways of making estimations”: no doubt some of them may be better than using a dartboard. For example, you could ask your cat.

15 Random Idiot July 22, 2014 at 5:27 am

What about the respective asset to GDP positions?

16 dearieme July 22, 2014 at 5:55 am

I occasionally ask about assets. I never seem to get a useful reply.

In Britain, I advocate that we move the capital to Berwick-upon-Tweed, with the Queen adopting the not-too-distant Holyrood as her principal palace. Then we could flog off all the government buildings in London. Buckingham Palace alone would bring in gazillions. Then Windsor ….

17 The Devil's Dictionary July 22, 2014 at 5:36 am

Whatever the Chinese debt-to-GDP ratio may be, I was happy to have left the Chinese stock market in October 2007.

18 andrew' July 22, 2014 at 5:44 am

I like your comment about the power charger except that I can buy 4 of them and use the 3 that don’t work to tie off garbage bags and still spend half.

19 kb July 22, 2014 at 8:40 am

or like costco produce; i can buy a bag, eat for 3 or 4 days, use whats left over for garden compost and still spend half.

20 Tom July 22, 2014 at 9:00 am

The pace of expansion is indeed far more important than the volume. The faster the pace of credit issuance, the bigger the drag when it slows. Rapidly decelerating private credit issuance is the main driver of recessions. Also of course the faster the credit issuance the lower the credit standards. Outstanding volumes speak mainly to systemic vulnerability. The more debt there is, the more likely it is that one debtor’s default will cause another’s, either directly through dependent income chains or indirectly by depressing asset prices.

21 Bill July 22, 2014 at 10:16 am

Send the Tea Party to China where they are needed most.

22 Boonton July 22, 2014 at 10:46 am

I was hoping we could just toss them into Boston Harbor. Perhaps they could swim to China.

23 Boonton July 22, 2014 at 10:45 am

Do you have a mortgage? If so could you pay the entire thing off in two years if you could sink your entire paycheck against it? I couldn’t, this would imply my ‘debt to gpd’ ratio is over 200%. Yet that in itself is not a problem since debt has to be serviced by either income from assets or transferring assets to lenders. While two years of my pay will not pay off my mortgage, the bank is happy with this state of affairs since they know I have income that will probably let me pay for at least a few years and I have an asset that they could take. Perhaps they would still be at a loss but it would hardly be anywhere near 100% of a loss.

24 Bill July 22, 2014 at 12:17 pm

That’s a good analogy, for those who equate family budgets with government budgets.

I also like the economic illiterate who use the “unfunded liability” meme to lead the ignorant by the nose.

If you phrase it in business terms, you would say that IBM has a massive unfunded liability…because it has bonds that it has to pay off in the future.

Or you have an unfunded liability in your mortgage. Ignoring that both you and IBM will be earning income, or bringing in revenue, in the future to pay for that “unfunded’ liability.

You can tell how ignorant a politician thinks his audience is by the terms and catch phrases he uses.

25 Boonton July 22, 2014 at 1:43 pm

Indeed, all of these debts are backed either by the gov’t’s ability to tax or by the ability to directly claim ownership of an asset (i.e. the ability to repo a house or car) or indirectly through the legal system (sue someone, get a judgement then use the judgement to take their stuff).

In a world without borrowing, I suspect assets would all be converted into shares and people would simply ‘sell shares’ of their car or house to the bank and then slowly buy them back to finance larger purchases. Notice, though, that even though shares seem to serve the same function as debt no one is screaming that a rising stock market is ‘borrowing’ from the future.

26 Bill July 22, 2014 at 2:00 pm

Every time I drive down a road, or visit an airport, that is financed by bonds–an unfunded liability!, Oh nasty unfunded liability!–I think about how silly it would be to fully fund the road, or fully fund the airport construction, with current taxes when the asset is used over time. It would be an intergenerational transfer–the past generation funding consumption of future generations.

27 Boonton July 22, 2014 at 2:36 pm

I would say unless you have invented a time machine, there is no such thing as funding from the past or future. Every road built by selling a bond means that someone opted to consume less today than they otherwise could have and someone else used that decrease to build the road rather than, say, make coffee drinks at Starbucks or take a long vacation.

It would be nice if the spending was directed into something that not only provided something for the current moment but enhanced our ability to consume in the future. A new road may be like that since tomorrow I can drive over it and get something done (like getting from point A to B) that otherwise would have required more effort. But even if it doesn’t, then there is no waste in the sense that the future has to ‘pay’ for the useless road. Yes maybe taxpayers have to pay the bond in the future but then the bond owner finally gets his cash back and he can go have those coffees or vacations he put off.

There is a cost, of course, but it’s an opportunity cost. That’s the ‘cost’ you pay every day you failed to follow your aunts advice to become a doctor. But as real as that cost is, it’s also not so painful since it’s mostly invisible.

28 Bill July 22, 2014 at 3:12 pm

Boonton, Agree with most except for the comment that someone’s current consumption comes at the expense of some other person current consumption. Not only can there be a shortage of aggregate demand making space for my current consumption, but I can magically time shift my consumption through time periods using bonds, or paying off debt for assets I will use in the future.

The wonders of modern finance make time shifting possible. Ask why you take on debt, why someone lends to you or why you might pay off your mortgage, or not.

29 Boonton July 22, 2014 at 3:21 pm

Modern finance timeshifts consumption on the individual level but not for all of society. I get a car loan, my ‘spending’ today is far above my income. But for years in the future my ‘spending’ is less my car payment. So it seems I have indeed, with the help of finance, time shifted future consumption for myself into the present. However the financial markets have to get the money from somewhere which means someone or something else that could have used that cash to spend on something opted instead to give to the financial markets.

The Keynesian view IMO is that because so many people will want to avoid some amount of consumption, some mechanism must force that ‘savings’ into present consumption and while the classical view of the financial market does some of that work, it doesn’t do all of it…hence the need for stimulus of some sort.

You can create demand without shifting it from someone/something else. Namely you can simply create money and ‘helicopter drop’ it down. Besides that, though, stimulus is actually a bit of a slight of hand. You’re tricking people who want to save into thinking they are saving (by buying bonds or putting their money ‘in the bank’) in reality you’re getting them to take their ‘savings’ and use it to spend by purchasing investment goods.

30 Bill July 22, 2014 at 4:20 pm

Oh, but Boonton, some people would like to purchase my promise to pay in the future, and to them that is an asset.. Guess what, finance is a time machine.

31 Boonton July 22, 2014 at 8:21 pm


You loan me $100. You ‘sell’ that loan to your buddy Bill for $100. You get to go out to dinner today. I get to go out to dinner. But Bill doesn’t get to go out to dinner. He used the $100 to ‘buy’ the loan.

32 Bill July 22, 2014 at 11:12 pm


Yes, and through the magic of the finance time machine, both you and I get to eat.

Go back and read your words: “I would say unless you have invented a time machine, there is no such thing as funding from the past or future.”

Oh yes there is.

33 Bill July 22, 2014 at 11:37 pm

Boonton, Let me give you another example. We’ll have three persons, Bill, Boonton, and Government.

Bill and Boonton, for whatever reason (fear of the future perhaps) both decide to save. Not spend on current consumption. Gov says: Hey, I can bring forward some spending, and I’ll give you a bond and you give me your savings to build a road.

Now, go back to your original words and look at your assumptions: “Every road built by selling a bond means that someone opted to consume less today they they otherwise could have {Notice your assumption} and someone else used that decrease to build the road rather than, say, make coffee drinks at Starbucks or take a long vacation.” True, during really bad recessions, people do take “vacations”, but it is not their preference.

34 Boonton July 23, 2014 at 8:02 am

Yes, and through the magic of the finance time machine, both you and I get to eat.

without the finance machine there were 3 people, Bill, and Bud. Bill and Bud have $100 each and were planning to go out to eat, I have $0 and could not. In that universe the economy makes 2 dinners that night.

In the world with the financial ‘time’ machine, Bill loans me $100 but then he sells that loan to Bud for $100. Again in that universe the economy makes 2 dinners that night. I get one and Bill gets one but Bud gets none. The machine hasn’t created new spending by ‘importing’ it from the future. It has just rearranged who gets to do the spending.

Bud has exchanged his ability to have dinner now with a promise to have one tomorrow when I pay off the loan. But suppose I welsh on the loan and don’t pay? Well tomorrow I’ll have $100 (because I’m not paying off the loan) and Bud doesn’t. Instead of Bud enjoying the dinner he was promised, I’ll be unfairly enjoying it. Not right but still the future economy isn’t making a dinner that it is ‘sending back’ in time somehow. It isn’t ‘paying off’ the debt. Debt certainly is a burden for the individual who bears its cost (myself if I pay up, Bud if I default) but again we are just looking at spending being rearranged in the present moment.

In your example where Bill & myself want to save because we fear for the future, the gov’t offers us a vehicle by selling us a bond. Again if you are cynical you can call this a bit of a trick. Bill and I want to avoid spending because we are fearful for the future, the gov’t essentially cons us into spending by making us think buying the bond is savings rather than spending. But to be fair the bond represents the ability for Bill and I to spend in the future since presumably we’ll be cashing the bond in then. That very well might have been the case in the previous example. Perhaps it was Wednesday and Bud said it’s boring to go out on Wednesday, he would rather go out on Friday so he brought the loan expecting to be paid back before Friday night.

What’s kind of interesting here is that you’re essentially talking about irrationality. If you were really fearful of the future you wouldn’t save but instead would be spending. You’d be stockpiling food and supplies, buying a productive assest like a small tractor so you could do some farming on your land, etc. A fearful person who is saving is acting on the assumption that tomorrow will be as stable or more than today hence he buys various financial instruments expecting to be able to cash them in decades from now.

35 Bill July 23, 2014 at 11:36 am

Boonton, There are times when Bill and his friends wish only to save, and not invest with current consumption. And, there are times when they collectively, through there government, decide to move forward purchases that would have been made in the future, or should be made now, by having their government purchase. And, as a result, Bill and his friends get something called bonds, which they view as a safe asset which they desire.

I know you know this if you ever took an econ course. And I also know that you know this because you refer to it as a con, which is not the way you would address it if you were not so fearful of its logic.

36 Boonton July 23, 2014 at 2:22 pm


There are times when Bill and his friends wish only to save, and not invest with current consumption. And, there are times when they collectively, through there government, decide to move forward purchases that would have been made in the future, or should be made now, by having their government purchase

I disagree here. Say Bill and his friends instead of going out to dinner with $100 today buy some bonds issued to build a new bridge. Would the bridge have been purchased in the future? No it wouldn’t IMO. Deciding not to build the bridge today doesn’t force ‘the future’ to build it. Consider if they never built the Brooklyn Bridge, it’s quite possible today we’d build it. Or maybe we’d build a tunnel. Or maybe Brooklyn would be a quiet neighborhood of rich houses who’d oppose any improvement to make it easier for traffic to go back and forth.

What we do know is that if Bill and his friends want to save buying the bond today would be a way to do it. Yet the reality is that bond is a sort of ‘trick’ since it doesn’t actually result in savings but spending….just a different type of spending but nonetheless the spending happens now, not the future. Likewise in the future there’s no burdensome ‘paying off’ of the debt. Bill’s grandkids pay tolls on the bridge which cuts into their ability to go out to dinner, but Bill gets checks each month as he cashes in his bonds enabling him to finally enjoy those dinners.

37 Boonton July 22, 2014 at 1:52 pm

What that implies IMO is that Keynes was right. It’s not debt or high stock/asset market prices that causes crashes. It’s a crash in investment. The more an economy moves beyond pure subsistence, the more investment spending it must generate to keep demand in line with supply. The financial markets are very good at directing funds people want to avoid spending into spending, but if they falter you have a crash in demand.

A economy without legal debt would still be vulnerable to manias and crashes.

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