Season 3 - Rethinking Asia: China’s Economy: Debt, Financial Risks, and Structural Challenges

Pacific Exchanges

In the next two episodes of our series Rethinking Asia, we look at the issue of China’s rising debt. In this first interview, we spoke with Yukon Huang, a senior fellow with the Asia Program at the Carnegie Endowment for International Peace. A renowned expert on China’s economy and its global impact, Yukon formerly served as the World Bank’s country director for China.

Yukon walked us through the recent growth and composition of China’s debt, and why he is more worried about the structural issues behind the debt than the overall level. He also highlighted several important distinctions, such as the large role of shadow banking and the property market, that make China’s debt situation different compared to that of most emerging markets. Some of Yukon’s main takeaways include:

• While China’s total debt-to-GDP ratio has rapidly increased about 100 percentage points since the Global Financial Crisis, the level of debt is reasonable for an economy of its structure and nature.
• The surge in debt levels is partly driven by the increasing prices of property-related assets in a country whose private property market only emerged roughly 15 years ago.
• The primary issue surrounding the surge in debt in China is more of a structural fiscal issue than a financial one: without sufficient tax revenues, local governments use land as collateral and borrow through opaque shadow banking activities to meet obligations.
• Unlike other debt-fueled emerging market expansions, the bulk of China’s debt is denominated in its local currency and China’s big state-owned banks steer too much funding into infrastructure at the expense of the private sector.
• A balanced approach by Chinese policymakers to financial sector deleveraging will restrict speculative shadow lending while ensuring private firms and local governments can access credit for innovative projects and public services.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.