Before continuing, we want to make it clear that this article only refers to government debt, also called public debt or national debt.
- Household debt is not included
- Corporate debt is not included
For more information on the types of debt that are relevant when analyzing a country, we would strongly recommend reading an article we have dedicated to just that before continuing with this one. Moving on, this article is written with the baseline assumption in mind that readers understand the three main types of debt we care about with respect to countries: public, household and corporate debt.
That being stated, does China have a government debt problem?
It ultimately all depends on our frame of reference.
On the one hand, we are dealing with an enormous sum and as such, a valid case could be made that from a nominal perspective, of course China has a government debt problem. On the other hand, however, things look far less grim when we compare the public debt level to the GDP of China and conclude that it is “barely” north of 50%.
Again, it all depends on our frame of reference and as such:
- If we are to compare China’s debt to GDP level to that of pretty much any Western nation, things do not look bad at all. Even the more than fiscally prudent Germany has a government debt to GDP level higher than that of China (down from slightly above 80% in 2012 to just north of 60% at this point in time) and as the list of example continues, China looks better and better. From the United Kingdom with its over 80% level to France with almost 100%, the United States with slightly over 100% and all the way to Japan with its staggering ~240% public debt to GDP level… let’s just say that from the public debt to GDP perspective, China hardly seems like the elephant in the room
- In nominal terms, however, we need to understand that from the previously mentioned list, only the United States has a GDP greater than that of China. As such, the situation looks less optimistic if we view things through a nominal lens
- Furthermore, it is worth pointing out that all of the previously mentioned nations are better-viewed by financial markets than China and if we also adjust for that, we have a potential major cause for concern on our hands. To put it differently, China is the most “risk-on” jurisdiction of those which have been enumerated and a valid question therefore emerges: what would happen if the market has to deal with a financial calamity and ends up in “risk-off” mode? More likely than not, China would be hit harder than the Western nations we have referred to. Let us remember that back when Argentina defaulted, it had a public debt to GDP ratio barely above that of China, yet still lost market access. In other words, the market ultimately decides when a certain country loses market access and yes, it is more than possible for a country with a double-digit public debt to GDP ratio to lose market access, while Japan with its well over 200% ratio doesn’t
- If we also factor in exogenous shocks such as China’s tricky trade situation with the West and the fact that (especially in the United States) measures have already been taken and more are on the pipeline, as well as anything from the COVID-19 situation which risks making markets grind to a halt to Hong Kong protests, it isn’t the least bit difficult to see China’s government debt to GDP ratio as not necessarily something that brings the financial system to its knees in and of itself but rather a potential component of a future “perfect storm” situation
- Finally, it remains to be seen what will happen in light of China’s more than obvious economic growth deceleration paradigm, correlated with the fact that the country has no choice but to switch from its status who model involving exports and infrastructure investments to one more dependent on domestic consumption. Will let’s say China’s emerging middle class be a potent enough force to counteract the various negative forces that are building up?
As can be seen, this is anything but a straightforward analysis where we can limit ourselves to simply comparing China’s public debt to GDP ratio to that of other nations, things are multiple orders of magnitude more complicated than that. It might therefore be wise to structure the conclusion(s) of this article as a series of questions.
Is China’s public debt to GDP ratio the most dangerous let’s call it endogenous risk factor?
Of course not because as mentioned in another article, corporate debt dwarfs public debt in China, with China actually representing an example that stands out compared to many Western nations, where the exact opposite is true. Therefore, there are far more obvious endogenous risk factors in China than public debt, this much is certain.
Can it, correlated with other risk factors, lead to a potential perfect storm situation?
Is China’s relatively low public debt to GDP ratio (compared to the West, at least) something which should make investors feel at ease?
No. Even if we are to leave potential lethal combinations with other risk factors aside, the fact remains that examples such as Argentina make it crystal clear that the market ultimately decides who loses access to financing, for reasons which may not be “fair” but on the contrary, seem downright peculiar.
Does this article paint a gloomy picture of China?
Of course not.
Here at ChinaFund.com, our main goal revolves around giving readers access to unbiased information, with this article simply bringing a risk factor to your attention. Where you take things from here is entirely up to you and, of course, the ChinaFund.com team is at your disposal if you would like to further pick our brains on this topic.