China’s debt level not at crisis threshold, debt level consistent with nation’s saving rate

China’s economic data recently have been above expectations. The stimulus promised during the NPC meeting last month will aid in sustaining this recovery into the second half of this year, noted HSBC. But, negativity regarding the country’s economy still continues. The focus is now on structural issues, such as debt burden, according to HSBC. According to certain people, the debt-to-GDP ratio in China has reached a level that might result in total risk and disrupt growth. But it is misleading to compare China’s debt-to-GDP ratio with other nations, said HSBC.

Admittedly, the country’s debt-to-GDP ratio is high. In 2015, it reached 250%. However, China has a usually higher rate of saving that has remained at more than 40% for two decades. The household sector saves more than they invest, whereas corporate sector is a net borrower. An increase of 1ppt in national saving rate suggests a 3.66ppt increase in debt level, implying that the country’s debt levels are in line with its saving rate, according to HSBC.

The debt levels of China do not seem to have reached the crisis level, suggesting the country can carry on with easing policy to combat deflation, noted HSBC. There is a slowdown in investment in sectors suffering from overcapacity. While policy easing can assist in curbing risks of a ‘debt deflation trap’, it can make reform agenda possible by making it easier to reorganize capital resources and labor in the process of restructuring, added HSBC.