Why China’s debt is not worth losing any sleep over, just yet

There has been a great deal of discussion lately about the level of total Chinese debt relative to national GDP. However, some of the conclusions reached may have been influenced by a misunderstanding of the actual situation. There is public debt, and then there is other debt – they should not all be treated as the same.

First, public (central government) debt in China is low, estimated to be around 20 per cent of gross domestic product, the lowest among major economies (for example, it is 250 per cent for Japan and around 100 per cent for the US). This is recognised by almost every observer of the Chinese economy.

Second, even if all the explicit local government debt (41 per cent of GDP at the end of 2015, according to the International Monetary Fund) is included as contingent central government liability, the total of 60 per cent is still low by world standards, and certainly so for an economy with a GDP still growing at between 6 and 7 per cent a year. It is actually most unlikely that all of the local governments will ultimately require a bailout by the central government.

Xi Jinping, China’s debt time bomb, and the art of saying nothing

Moreover, almost all government debt is denominated in renminbi, so there is no question about the ability of the central government to repay its debt, just as the US can always repay its dollar-denominated debt by printing more money. Furthermore, Chinese debt is mostly held by Chinese nationals, either individuals or institutions, so that it is similar in nature to intra-family debt and can be sustained for a long time if necessary.