Over a year ago we began talking about China’s economic slowdown and its impact in the world, including as a contributing factor in the ongoing oil crisis. Today we would once again return our gaze to the most populated country on Earth and its economic problems as we saw China’s credit score get downgraded for the first time since 1989.
So what is the root cause for China’s unfavorable economic standing? In short – debt. According to data by the Bank of International Settlements, China’s debt last year amounted to the staggering 170% of its GDP, much more than the average debt of most countries. This massive debt is believed to have been accumulated after the financial crisis of 2008 when China engaged in heavy financial borrowing in order to funds its extensive infrastructure projects.
Of course, this is not news to China itself. The government has been aware of the issue for years and has been taking some measures to tackle it. Among revising policies to limit the negative impact of loans, however, the Chinese government hasn’t implemented anything drastic because they are still trying to preserve the country’s high growth rates.
Investors are split on the matter. Some think that China isn’t doing enough to solve the debt problem. Others fear that if the government intervenes too dramatically, it could make matters worse and even trigger a financial crisis in the country.
Nevertheless, while economist are actively interested in the issue, they are not too worried about it. China has a relatively low government debt, so they could potentially issue some bailouts to balance out their economy. So while China might be in a bit of trouble, it is by no means desperate and has in fact many options to deal with its corporate debt.
Still, it’s important to follow any news pertaining to new policies in China, as well as Trump’s pressure on the trade deficit. These may exacerbate the problem – and since China is the second largest economy in the world, its problems are everyone’s problems too.
