Policy Brief 26, June 2016

Debt Dynamics in China – Serious problems but an imminent crisis is unlikely

Recently, there have been many articles in the international media predicting that China is facing an imminent financial/debt crisis worse than the 2008 US sub-prime crash. However, a closer look at the debt dynamics in China highlights some fundamental differences be-tween the debt situation of the source country of the 2008 global financial crisis and that of China.

Facts point to worrisome debt trends and problems, in particular with the corporate sector and the fast credit expansion, but would not support the current gloom and doom predictions. China’s debt dynamics is an excellent case to demonstrate that assessing debt sustainability and tracking debt vulnerabilities is a complicated task.

This policy brief has offered some policy recommendations in this regard.

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