Why China’s Bubble Is a Threat to the Global Economy
China’s ballooning corporate debt remains the number one systemic risk to global economic recovery. If the bubble bursts, it will drag down the rest of the world while compromising Chinese Premier Xi Jinping’s grip on power ahead of the Chinese Communist Party congress late in the year. Beijing understands that the debt is hardly sustainable, so over the last two years it has engineered a sophisticated macroeconomic strategy to artificially boost factory prices, increase profits, and ease loan repayments for the most troubled companies. But as economist George Magnus put it, “you can’t resolve a debt problem peacefully.”
Chinese corporate debt is approaching dangerous levels by both historical and cross-country standards. At around 170 percent of GDP, China’s corporate debt rate is the highest in the world. Moreover, the so-called credit gap, which measures how fast credit is growing with respect to the economy, currently stands at 30 percent—well above the eight percent threshold that, in past crises, marked an imminent crash. Not surprisingly, Moody’s has recently downgraded China to A1 from Aa3 for the first time in thirty years. “Western rating agencies,” said a government-affiliated newspaper in response, “often look at China through a telescope.” In the eyes of Chinese bureaucrats, domestically financed debt, a high savings ratio, and healthy public finances should be enough to ward off financial risks.