China's debt: how serious is it for markets and the economy?

China's debt-driven economy is making some investors nervous. Geoffrey Wong, Head of Emerging Markets Equities, explains what debt means for China's economy and investors in a short video interview.

18. Jan. 2018

China's debt issue: four key points

  • China's debt is domestically, rather than externally, financed;
  • China's high savings rate means a balance-of-payments debt problem is unlikely;
  • Most of the debt is concentrated within the government, not the private sector;
  • China has a lot of growth potential and, unlike Japan, has room to grow out of the debt it is currently carrying.

China's debt: how serious is it and will it cause an economic crisis?

China's debt is a significant issue, but not one that will cause a crisis in China's economy, according to Geoffrey Wong.

That's because, firstly, China's debt is domestically financed.

China has one of the highest savings rates in the world, so borrowers borrow from banks, who have huge savings pools to fund debt issuance. That's a crucial difference with what happened in the Asia Crisis of 1997 and 1998, where much domestic borrowing was funded in USD from abroad, so China's debt levels won't cause a balance of payments problem.

Secondly, more than half of the borrowers carrying China's debts are state-owned enterprises (SOEs), and the banking system is dominated by state-owned banks. This means most of the debt is concentrated within the government, not within the private sector.

Finally, China still has a lot of growth potential. Unlike the Japan situation in 1990, China still has a lot of productivity gains ahead of it, so it has the room to grow its way out of the debt to some extent.