Huge debt has put China in the danger zone for financial crisis

China’s debt—estimated to hit 327% of GDP by 2022 and double the level in 2008—increases the risk of a financial crisis, according to a recent Bloomberg report.

The rapid growth and high level of China’s debt have already placed the country in the danger zone for a financial crisis, Bloomberg Economics economists Fielding Chen and Tom Orlik are quoted as saying.

While the estimated debt-to-GDP ratio will put China among the most indebted countries in the world, adding debt equivalent to almost 70% of GDP in the next five years wouldn’t mean a crisis is inevitable but it would severely reduce the chances of avoiding one, the report cited the economists as saying.

Bloomberg noted that its estimates of future debt levels are based on a new model that assumes a moderate slowdown in growth, continued rebalancing of the structure of the economy toward services, a stabilization in the credit intensity of growth, and continued large-scale write-offs of bad loans.

China’s Central bank Governor Zhou Xiaochuan has also warned of the risks in company and household debt and excessive optimism that could spark a sudden drop in asset prices.

The two economists also put the nominal GDP growth—which is more relevant for debt-to-GDP ratio calculation—at 7.9% in 2022 compared with 8% in 2016. 

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