How China keeps its debt in order | (2024)

On paper, the Chinese government appears to owe very manageable debt for a country that has relied so much on investment for its growth. By official definition, general government debt, which includes central and local government debt, is about 55 per cent of GDP, a level comparable to Asia Pacific peers such as Australia and Korea, which are much richer in GDP per capita terms. This implies that Beijing has plenty of headroom to help the many provinces in debt trouble. Last November, policymakers announced the issuance of RMB 1tn (USD $140bn) of special government bonds to support local governments, which raised the 2023 budget deficit by 0.8 percentage points to 3.8 per cent.

But that is a drop in the ocean for an economy the size of China’s. Investors have been scratching their heads over the lacklustre stimulus deployed by the government for its struggling economy. A look at the broader general government debt, which also includes government related funds, offers a slightly better explanation of China’s fiscal conservatism. That figure is estimated to stand close to 70 per cent of GDP at the end of 2023, which makes China more vulnerable than other, lower rated emerging markets such as Indonesia and the Philippines, and closer to peers such as India [1], judging just from this single indicator.

But even that figure fails to capture the enormity of the risks in local government financing vehicles, or LGFVs. These shadow financing tools helped the provinces prosper during the decades of China’s debt-fuelled growth. They enabled the construction of impressive roads and railways, while shelving liabilities off the government’s balance sheet. But they relied on land sales and began to unravel as the real estate sector tumbled in 2021. With RMB 60tn worth of debt, LGFVs cannot be completely disregarded when investors assess the government’s fiscal burden. Although we consider any scenario where all LGFV debt would need to be recognised as a liability of the central government highly unlikely, when it is included it brings China’s government debt ratio to roughly 130 per cent - elevated among emerging markets and comparable with developed markets that resorted to quantitative easing, including Eurozone countries (France, Italy), the UK, the US and Canada.

If growth slows further, LGFVs won’t be the only ones seeking support. Corporate debt adds another 123 per cent of GDP worth of liabilities, a large chunk of which is owed by state-owned enterprises (SOEs) [2]. In addition, household debt - mostly mortgages - is 61 per cent of GDP. 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.

This explains why a central government with apparently manageable debt seems to be playing for time with so-called ‘extend and pretend’ debt management strategies. Beijing has directed local governments to embark on a RMB 1.5tn debt swap with LGFVs. It will cover only half the average interest cost of outstanding LGFV debt, but with the additional bond issuance these actions will shore up liquidity and, crucially, investor confidence. Banks have also been told to go on ‘national service’ by refinancing LGFV loans. An infrastructure LGFV in Zunyi, a remote city in the less affluent Guizhou province, received a 20-year extension on its LGFV’s debt and will only pay interest for the first 10 years, according to local media reports.

Acknowledging the urgency of the debt challenge, the government also accelerated spending last year that was already approved, for instance by frontloading a portion of the RMB 4.3tn local government bond issuance ahead of schedule. With an additional refinancing bond issuance of about RMB 1.4tn in 2023, total local government bond issuance reached 4.5 per cent of GDP for the full year. Incremental new spending is likely to focus on strategic national priorities, such as high-end manufacturing and more commercially viable infrastructure projects.

Housing headaches

The underlying problem is structural. China has raised too much debt for the amount of demand there is in its economy - an imbalance that could get worse before it gets better.

The housing market has been the linchpin of Chinese growth. Its success drove local government revenues. As the property sector cooled, apartment sales dipped to just 9.6m flats last year — the lowest since 2012, and way below the high of almost 14m flats in 2021. But the debt structure of property developers is built to support the sort of demand seen in the decade before the recent correction. There aren’t many choices for a country in this situation: either drive up demand, or reduce supply.

Homebuyers in China do not just represent demand, they are the developers’ ultimate creditor. For years, the housing industry ran on a presales model: customers committed cash upfront, sometimes years in advance, before projects even began. The machine ran fine with the high demand of previous decades. But today, the population is peaking, consumer confidence is low, and a lot of demand has already been met after a decades-long building spree. We don’t believe a recovery in homebuyer demand could bail out developers this time around.

The other option is to fix the blockage on the supply side. Industry estimates indicate that the majority of real estate assets in China are inventory - projects that are sold, but not yet built. Government aid for developers to complete unfinished projects would help stabilise prices, and in turn put more pressure on developers’ debt service capability in the near-term. These dilemmas have put policymakers in a tough spot and resulted in less decisive policy support, which in turn dampens investors’ expectation on China’s long-term growth. Indeed, these challenges have been severe enough to alarm at least one international credit rating agency: Moody’s replaced China’s stable outlook with a negative view in December.

Pain for gain

In an ideal world, LGFVs should look more like commercial companies. The winners would employ a managerial mindset to get debt down, and the losers would be allowed to fail. Capital and revenue streams would be redirected to productive industries. The housing market should correct itself at the cost of wealth destruction and real estate industry consolidation to rebalance supply-demand. Painful as it is for households to see their net worth dwindle in line with falling home prices, they may end up with more balanced asset allocation that includes more of other financial assets, such as equities and bonds.

But with the debt pile high and demand sluggish, undertaking market-driven reforms for LGFVs is less a priority for China than getting them to stabilise their finances, fast. “Safeguarding against systemic risks” remains China’s paramount concern today. This is in contrast with the last big debt crisis of the 1990s, when the country was still in the early phases of reform and opening up to the world. Officials doubled down on cleaning up bad debt and privatising state-owned enterprises.

Some LGFV bonds could even enjoy a bit of a rebound in the short term thanks to more soft bailouts. High yield LGFVs were among the best performing onshore credits in August as policy shifted to a more accommodative stance. Likewise in the broader government bond market, policy tweaks are reshaping the landscape for investors. The Chinese leadership’s recent commitment “to keep liquidity reasonable and adequate and financing costs constantly decreasing” signals lower long-term rates, and makes bond investments more attractive in the medium-term. Counterintuitive as it may sound, China’s debt market that has been the cause of so much concern for investors could also be where investors find cherished assets.

[1] Unless otherwise specified, all debt-to-GDP numbers in this article are based on the International Monetary Fund’s calculations.

[2] A report by the credit rating agency S&P Global in 2022 estimated that 79 per cent of corporate debt in China was owed by SOEs (the IMF does not break down the proportion of debt owed by SOEs).

How China keeps its debt in order | (2024)


How China keeps its debt in order |? ›

Because debt accumulation in China has been financed mostly by domestic savings, overall financial risk is limited. The state owns many of the key creditors and debtors, which means a financial shock is unlikely to set off a financial crisis or a collapse in growth.

How does China hold our debt? ›

There are several reasons why China buys U.S. Treasuries. These instruments are among the world's safest assets, making them secure and stable and the U.S. dollar remains the world's reserve currency in international trade This allows the Chinese central bank to effectively hold dollar-denominated assets.

Which countries owe the most debt to China? ›

20 Countries Most in Debt to China
  • Belarus. ...
  • Cambodia. ...
  • Ecuador. ...
  • Nigeria. ...
  • Egypt. ...
  • Lao People's Democratic Republic. Total External Debt to China (2022): $5.25 billion. ...
  • Bangladesh. Total External Debt to China (2022): $6.05 billion. ...
  • Zambia. Total External Debt to China (2022): $6.08 billion.
Apr 4, 2024

What is the bad debt in China? ›

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.

What country has the most debt? ›

Profiles of Select Countries by National Debt
  • Japan. Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP. ...
  • United States. ...
  • China. ...
  • Russia.

Does the U.S. own any of China's debt? ›

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.

Who owes China the most money? ›

These countries owe China billions. Some are struggling to pay
  • Kazakhstan: $64.2 billion (£51bn) total debt. ...
  • Angola: $64.8 billion (£52 billion) total debt. ...
  • Pakistan: $68.9 billion (£55bn) total debt. ...
  • Venezuela: $112.8 billion (£90bn) total debt. ...
  • Russia, $169.3 billion (£134bn) total debt.
Feb 26, 2024

Is China's debt worse than the US? ›

China's debt overhang far exceeds the burdens facing the United States. As recently as 2020, total debt in the United States relative to GDP exceeded China's. But as of mid-2022, China's relative debt burden stood 40 percent higher than America's.

Why do we owe China so much money? ›

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.

Who owes the US money? ›

In total, other territories hold about $7.4 trillion in U.S. debt. Japan owns the most at $1.1 trillion, followed by China, with $859 billion, and the United Kingdom at $668 billion. In isolation, this $7.4 trillion amount is a lot, said Scott Morris, a senior fellow at the Center for Global Development.

What would happen if China called in all US debt? ›

If China called in all of its U.S. holdings, the U.S. dollar would depreciate, whereas the yuan would appreciate, making Chinese goods more expensive.

Which country has no debt? ›

1) Switzerland

Switzerland is a country that, in practically all economic and social metrics, is an example to follow. With a population of almost 9 million people, Switzerland has no natural resources of its own, no access to the sea, and virtually no public debt.

Is China in trouble financially? ›

China is not only saddled with debt and facing the need for belt-tightening. As the premier's work report acknowledged, the bureaucracy is riddled with inefficiency, waste (especially involving priority government projects), and corruption.

How can the US get out of debt? ›

Tax hikes alone are rarely enough to stimulate the economy and pay down debt. Governments often issue debt in the form of bonds to raise money. Spending cuts and tax hikes combined have helped lower the deficit. Bailouts and debt defaults have disadvantages but can help a government solve a debt problem.

Who is America in debt to? ›

The public owes 74 percent of the current federal debt. Intragovernmental debt accounts for 26 percent or $5.9 trillion. The public includes foreign investors and foreign governments. These two groups account for 30 percent of the debt.

Who does the US owe the most money to? ›

Nearly half of all US foreign-owned debt comes from five countries.
Country/territoryUS foreign-owned debt (January 2023)
United Kingdom$668,300,000,000
6 more rows

How much does China owe the United States? ›

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).

Why is China selling US debt? ›

Selling Treasurys is a fast way to whip up U.S. dollars, and China will sometimes use extra dollars to go out on the global market and buy up their own currency. That artificially pumps up its value. It's like planting someone at an auction to drive up your prices.

What happens if China sells us debt? ›

It's going to put it into bonds of other countries. It will have to buy other currencies in order to invest in those countries' bonds. So US interest rates will no doubt rise as the supply of US Treasury bonds suddenly increases and the dollar will fall as China moves a lot of money out of dollars.

Who owns over 70% of the US debt? ›

Who owns the most U.S. debt? Around 70 percent of U.S. debt is held by domestic financial actors and institutions in the United States. U.S. Treasuries represent a convenient, liquid, low-risk store of value.

Top Articles
Latest Posts
Article information

Author: Van Hayes

Last Updated:

Views: 6237

Rating: 4.6 / 5 (66 voted)

Reviews: 89% of readers found this page helpful

Author information

Name: Van Hayes

Birthday: 1994-06-07

Address: 2004 Kling Rapid, New Destiny, MT 64658-2367

Phone: +512425013758

Job: National Farming Director

Hobby: Reading, Polo, Genealogy, amateur radio, Scouting, Stand-up comedy, Cryptography

Introduction: My name is Van Hayes, I am a thankful, friendly, smiling, calm, powerful, fine, enthusiastic person who loves writing and wants to share my knowledge and understanding with you.