China's debt problem (2024)

FAQs

Why is China's debt a problem? ›

Altogether, China's gross national debt is over 300 percent of GDP. A high debt burden constrains the government's fiscal firepower, preventing it from unleashing bolder stimulus and weakening its effectiveness when implementing support measures.

China is in the midst of a profound economic crisis. Growth rates are flagging as an unsustainable mountain of debt piles up; China's debt-to-GDP ratio reached a record 288% in 2023.

How bad is it? China's debt is more than 250 percent of GDP, higher than the United States. It remains lower than Japan, the world's most indebted leading economy, but some experts say the concern is that China's debt has surged at the sort of pace that usually leads to a financial bust and economic slump.

If China (or any other nation that has a trade surplus with the U.S.) stops buying U.S. Treasuries or even starts dumping its U.S. forex reserves, its trade surplus would become a trade deficit—something which no export-oriented economy would want, as they would be worse off as a result.

Debt owed by state-owned industrial firms is another 74% of GDP according to the International Monetary Fund. The three government-owned banks (China Development Bank, Agricultural Development Bank of China and Exim Bank of China) owe a further 29% of GDP.

Nearly half of all US foreign-owned debt comes from five countries. All values are adjusted to 2023 dollars. As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).

No doubt China faces many structural and other challenges: slumping productivity, a shrinking labor force, restrictions on the transfer of technology imposed by the United States and other countries, an ongoing real estate bubble's correction, elevated unemployment among younger workers, and a leadership that seems to ...

To a lesser extent, China's stronger economic growth, weaker social safety net, and lower urbanization are also important factors responsible for China's higher saving rates. China's currency undervaluation turns out to be a relatively modest contributor to China's high saving.

Foreign countries buy US Treasury securities since they are considered as one of the most secure assets. Among other countries, Japan and China have continued to be the top owners of US debt during the last two decades.

Why does America owe China so much money? ›

The United States supported China's entrance into the World Trade Organization at the turn of the millennium, which led to an export boom of Chinese goods into the U.S. China ended up parking much of its sales in U.S. Treasurys, CNN reported, because of their perceived safety as an investment.

The United States pays interest on approximately $850 billion in debt held by the People's Republic of China. China, however, is currently in default on its sovereign debt held by American bondholders.

With $1.1 trillion in Treasury holdings, Japan is the largest foreign holder of U.S. debt. Japan surpassed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings in four years.

2019 due to Russia & China selling their Treasury bonds? According to the US Treasury, Russian ownership of US Treasuries was $2.1 Billion in Nov 2022. That's so small an amount it might as well be zero.

One of the main culprits is consistently overspending. When the federal government spends more than its budget, it creates a deficit. In the fiscal year of 2023, it spent about $381 billion more than it collected in revenues. To pay that deficit, the government borrows money.

We then estimate that China's total nonfinancial sector debt amounted to 235.1% of GDP, a high level relative to other emerging markets, among which public sector debt was 53.2% of GDP while private sector debt amounted to 181.9% of GDP.

Nominal GDP Growth Rates During the Asian Financial Crisis

From a national perspective, China buys U.S. debt due to its complex financial system. The central bank must purchase U.S. Treasuries and other foreign assets to keep cash inflows from causing inflation. In the case of China, this phenomenon is unusual.

Total bad debt climbed 6.16% to 61.6 billion yuan last year. Zhu said bad real estate debt had peaked in 2022, with the bank tightening lending following a so-called whitelist.

The collapse of Evergrande, once the world's most valuable real estate company, marked the beginning of China's real estate crisis. Founded in 1996, Evergrande targeted the upper-middle class, but excessive borrowing and overbuilding led to its downfall.