Is China More Indebted Than Western Nations? (Broad) Types of Debt Explained

You might hear one expert state that China is less indebted than Western nations and then a few minutes later, flip the channel and come across another expert who just as confidently states that China is more indebted than Western nations, with the average observer left scratching his head and assuming this issue is just too hard to tackle.

Fortunately, it’s not.

At the end of the day, it all depends on what exactly it is that you are measuring.

For example, is it true that China can be considered LESS indebted than Japan?

Yes, it can be true.

Is it true that China can be considered MORE indebted than Japan?

Once again and as strange as it may seem, the answer is also yes.

How can this be possible?

Simply put, what you need to understand is that there are different types of debt and that in our example, both “experts” are committing the colossal mistake of not being precise enough. It is just “bad form” to limit yourself to stating that one country is more or less indebted than the other, for the simple reason that you are spreading confusion by not explicitly mentioning which debt type you are referring to, especially in light of the fact that one type can tell a completely different story than another.

Broadly speaking, there are three main types of debt in China and every other nation:

1. Household debt or, as the name suggests, debt held by the general public. From citizens buying real estate and getting a mortgage to consumption-oriented personal loans, this debt type tracks the “health” of the general public in terms of how much is being borrowed
2. Public debt, which one again as the name suggests, refers to debt taken on by the government of a certain country. From debt taken on so as to invest in let’s say infrastructure in the hope that future economic growth will make it all worth it to new debt you take on to pay back existing debt, this debt type tells us how conservative or not a certain government has proven to be
3. Corporate debt, taken on by (of course) businesses for defense (staying afloat and keeping up liquidity-wise) or offense-related (aggressive investments, r&d, etc.) purposes through loans, corporate bonds or variations thereof

Is China less indebted than Japan?

It… depends:

1. From the perspective of household debt, it is slightly less indebted than Japan but nothing Earth-shattering, with the difference between them based on this metric being in the 10 percentage point zone
2. From the perspective of public debt, China is far less indebted than Japan, with China’s debt to GDP ratio being a staggering 4 times lower than that of Japan
3. From the perspective of corporate debt, China is actually more indebted than Japan. Considerably more even, with China’s corporate debt as a percentage of its GDP being over 50% greater than that of Japan

As can be seen, we are talking about even “black vs. white” levels of difference when it comes to household debt, public debt and corporate debt, which should make it obvious why you should raise an eyebrow whenever coming across a so-called expert who isn’t specific enough to make it clear what type of debt he is referring to.

If the differences between the three were mild when it comes to most countries, it wouldn’t represent that much of an issue. However, they are… well, anything but. As such, the average observer ends up frustrated and confused because he keeps coming across information that he perceives as being contradictory. For this reason, “getting” China or any other nation from the perspective of the debt burden dimension becomes problematic.

Finally, in the spirit of not ending this article without answering the question which constitutes its title, we will point out what when it comes to the household debt as well as public debt dimension, the answer is that no, China is for the most part not as indebted as its Western counterparts. As far as the corporate debt dimension is concerned, the exact opposite tends to be true. For example, the United States has a greater corporate debt to GDP level than Germany, the United Kingdom has a higher one than the United States, Japan has a higher one than the United Kingdom and as mentioned in this article… China has a (much) higher corporate debt to GDP level than even Japan.

In the spirit of digging deep (something the ChinaFund.com team does not shy away from), we will cover all three debt types from the perspective of China through a dedicated article. For now, our purpose when it comes to this specific article is laser-focused: making it clear why it is vital to be specific when referring to debt levels associated with one country or another.

In the absence of clarity when it comes to topics such as this one (which many mistakenly believe are overly complicated despite the opposite being true as long as simple logic is applied), confusion will abound as far as your perspective on China in our case is concerned, which inevitably leads to decisions that end up being sub-optimal at best due to not revolving to a sound enough degree around facts.

The role of an expert is not sounding as intelligent as possible by using complex terminology that somehow places him in an “ivory tower” context compared to mere mortals. On the contrary, the role of an expert has everything to do with making the seemingly complicated easy to understand or, if you will, with proverbially dumbing things down so that the correct end goal is reached: not sounding or trying to sound smart but rather ensuring that clients meaningfully understand the message you are trying to get across. Needless to say, the ChinaFund.com team believes in the latter and is looking forward to making it clear that the economic dimension in no way has to revolve around rocket science.