Summary: The rapid rise in China’s debt and leverage has been a major concern, with controlling debt growth and stabilizing leverage ratios being a key focus of recent economic policies. This paper explores the evolution of debt behaviors over the past twenty years, addressing four key questions: where the debt comes from, the role of debt, how to spot debt risks, and how to manage the balance between debt growth and risk.
Overall, China has not accumulated too much debt; the growth in debt has not led to excessive financial assets or purchasing power , evidenced by low inflation rates over the past decade and persistent issues of insufficient demand.
The ability of Chinese households and the government to pay off debt is strong, with substantial debt risks concentrated in local government financing vehicles, real estate businesses, and debts of manufacturing and small businesses.
Managing the debt risks of LGFVs requires a controlled and diverse approach. Addressing the debt risks of real estate companies can't rely solely on the companies or local governments; it needs prompt action from economic authorities. It's crucial to promptly address the debt risks in the manufacturing and small business sectors before they become new sources of debt risk.
