China Decides Debt Can Be Dangerous

The Chinese Communist Party is now officially worried about mounting debt. “A tree cannot grow up to the sky—high leverage will definitely lead to high risks,” said a front-page commentary in the People’s Daily on May 9. The author of the commentary was identified as “an authoritative person,” usually code for the top leadership. “Any mishandling will lead to systemic financial risks, negative economic growth, or even have households’ savings evaporate. That’s deadly.”

Liberal lending has been a part of the economy for years. The concerns arise now because the expansion of debt is approaching critical levels. In the years since China unleashed billions in loans to weather the global financial crisis of 2008, overall debt has grown from 164 percent of gross domestic product to 247 percent last year, Bloomberg Intelligence estimates. Household and central government debt are still manageable at 41 percent and 22 percent of the economy, respectively, but corporate debt, at 165 percent, is much higher than in most developing countries.