China’s debt increased dramatically

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China’s debt has increased over the past few decades. This is one of the biggest economic challenges confronting the Chinese Communist Party in almost 100 years.

Beijing, in recent years, tried its best to reduce the reliance of the country on debt for growth. It decided to identify the ballooning debt as a threat to economic stability. But that deleveraging effort paused last year because of Covid-19.

Last year, the pandemic prompted the government to make it easier for companies to get loans while hitting China’s economic growth. As a result, last year, China’s debt soared to record levels.

Record debt levels

China accumulated debt rapidly at the beginning of the global financial crisis in 2007 and 2008 when the governments dealt out a massive stimulus package primarily funded through bank loans.

The Bank of International Settlements data showed that China’s debt levels stabilized for several years. However, they started increasing again to reach nearly 290% of the gross domestic product last year.

However, China is not alone in this crisis. BIS data showed that other economies like the U.S., Japan, and some countries in Europe experienced an uptick in debt ratios. It occurred as authorities worldwide increased spending to help households and businesses through challenges caused by the pandemic.

Breakdown of China’s debt

According to BIS data, the corporate sector in China accounted for a massive debt at over 161% of GDP. In the meantime, government debt became the largest share of total debt in Japan and the U.S.
After pausing for much of last year, the country has renewed a multi-year effort to rein in debt in recent months, with its economy recovering from the pandemic.

That effort showed some results. China’s total social financing, liquidity in the economy, and a broad measure of credit rose by 11% at the end of May, slowing from an 11.8% growth.

Economists projected that credit growth in China would be somewhere between 11% and 11.5% by the end of this year compared to 2020.

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