China’s Economic Outlook Darkens as Debt Ratio Approaches 300%

China’s debt-to-GDP ratio has soared to a record high, nearing 300% at the end of last year. The slowdown in China’s economy is directly affecting this increase.

Quoting a report from the National Institute of Financial Development (NIFD), a think tank under the Chinese Academy of Social Sciences, Chinese media outlets such as Caixin reported the following on the 30th. According to the report, the macro leverage ratio, representing the total non-financial debt ratio to nominal GDP, increased by 13.5 percentage points from the previous year to 287.1% in 2023.

The Chinese government’s debt also increased by more than 10% compared to the previous year. As of the end of 2023, the central government’s debt was 30.8699 trillion yuan, an increase of 4.16 trillion yuan from the prior year, and the fiscal deficit rate exceeded the target (3%) at 3.8%. The local government’s debt was 40.74 trillion yuan. Although it was lower than the target limit of 42.17 trillion yuan set at the beginning of the year, the increase exceeded the target limit by more than 1 trillion yuan, with an increase of 5.68 trillion yuan. NIFD pointed out the debt problem of local government financing vehicles (LGFV), which had surged to an unbearable level, as a direct cause. This is related to the central government issuing special bonds to resolve LGFV debt.

There was no dramatic change in the debt ratio. The government’s debt ratio increased by 5.3 percentage points from last year to 55.9% overall. In comparison, the household and non-financial corporate debt ratios also increased by 1.3 percentage points and 6.9 percentage points, respectively. Nevertheless, the report analyzed that the sharp increase in China’s total debt ratio in a year is related to the slowdown in economic growth.

Last year, China’s GDP growth rate achieved its target of 5%, with a 5.2% increase from the previous year. However, this is the real GDP considering inflation, and the nominal GDP growth rate, the denominator of the macro leverage ratio, stayed at 4.6% last year, down 0.2 percentage points from the same period the year before.

Zhang Zhiwei, a chief economist at Pinpoint Asset Management, said, “The fact that the nominal GDP growth rate is lower than the real GDP growth rate suggests that China’s economic growth is falling below the potential growth rate.”

The report suggested that “to maintain macro leverage stably, it is important for the government to raise the nominal GDP growth rate,” and “the nominal growth rate target should be set around 7%.”

It also advised, “the central government needs to borrow more money to alleviate the debt burden of local authorities and maintain a certain level of fiscal deficit,” and “interest rates should be lowered to reduce the cost of fundraising, and fiscal policies should be prepared to stimulate the economy.”