Making Sense of China’s Government Debt Sustainability (or Lack Thereof)


According to the most recent IMF data that is available (their April 2019 World Economic Outlook dataset), the general government gross debt of China as a percentage of its GDP is 55.4%, which seems remarkably low if you compare it to many of the world’s most developed nations. In fact, China’s gross debt to GDP ratio puts it just above Guinea-Bissau and below Kenya, to make an anecdotal remark that’s meant as a metaphor rather than a scientifically robust statement (this is because, while exceptions, there are developed nations here and there with ratios similar to China’s).

Compared to Japan, with its (in)famous 237.5% ratio and a series of top economies that are either above 100% or in the 100% zone (for example Italy, the United States or France), it might seem that things are downright sustainable when it comes to the government debt equation over in China but… well, it’s a bit more complicated than that (to put it mildly).


Primarily because the IMF does not consider China a so-called “advanced economy” at this point and the same principle is valid for other international institutions, financial markets and so on. In fact, China’s ratio is pretty much at par with the mean for emerging markets and developed economies, which sits around 53% at this point. For advanced economies, despite exceptions such as Germany with it’s comparatively low 56.9%, the mean sits at 103% at this point in time.

What does this mean in terms of sustainability?

It means that despite China’s ratio being considerably lower than that of most advanced economies, in the event of a global financial calamity for example, China might lose market access while more indebted nations don’t. This is because, when capital becomes frightened, it turns to advanced economies due to them being perceived as safe havens, to the detriment of emerging markets and developing economies, perceived as risky.

While few aspects are set in stone when it comes to economics and especially the more volatile dimensions of economics such as market sentiment, it’s how things stand at this point in time and precedents abound. From emerging economies which have been hurt more by the Global Financial Crisis of 2007-2008 than the United States despite the calamity having its origins deeply entrenched in the Mortgage-Backed Securities fiasco of the US to examples such as Argentina’s deep financial crisis less than 20 years ago, despite its debt to GDP being closer to China’s at that point in time than to the average for advanced economies.

Simply put, the market ultimately decides when you lose access to outside capital and from this perspective, advanced economies tend to have an edge. Also, while we can consider many of these concerns more or less fair, it is worth noting that an additional argument in favor of questioning the sustainability of China’s ratio revolves around the debt acquisition trend, with this ratio pretty much doubling in just 11 years.

On the other hand, though, there are more than enough positive dimensions.

For example, compared to advanced economies, many of which are stagnating and even drowning in a sea of bureaucracy and complacency-induced exhaustion, there is ample room for China to catch up by continuing its GDP growth trajectory. Frankly, it is hard for this author to envision any long-term scenario in which China doesn’t dominate. However, due to the vulnerabilities this article refers to, China’s impressive trajectory might and probably will be occasionally interrupted by possibly dramatic shorter-term corrections.

As an investor who is interested in having exposure to Chinese assets for the long haul, it is imperative that you stay on top of the pros as well as cons associated with this economy. An ignorant investor, for example, might be quick to say “I told you so” when the Chinese economy eventually corrects, whereas someone with a fact-based long-term perspective will see it as a more than welcome buying opportunity.

Here on, we tend to be in the latter category. For many of the reasons outlined in some of our other articles, our firm belief is that long-term scenarios which do not revolve around China increasing its economic dominance are unlikely. Therefore, we remain extremely bullish on longer-term timeframes. At the same time, however, we do not want to be caught over-exposed when the market experiences shorter-term corrections. On the contrary, we want to be armed with enough capital so as to take advantage of them rather than be underwater and as such, prudence is the operative word when it comes to our overall strategy, as (hopefully) made clear by the balanced perspective we tend to display in our articles.