China’s ability in managing debt gives it leeway to launch counterattack against US

Trade frictions between China and the US have once again drawn people’s attention to China’s debt problem. Some analysts have said China’s total debt has surpassed 300 percent of its GDP, citing data from the Institute of International Finance (IIF), posing a great risk that makes the Chinese economy more brittle than many imagine as it faces external attacks.

However, those views tell only part of the story. Data from the IIF showed global debt reached a new record high of $217 trillion in early 2017, or 327 percent of the world’s GDP. It seems China’s debt-to-GDP ratio is still below the global average.

China’s debt problem certainly deserves attention, but it should not be overestimated. China is unlikely to have a debt crisis. In fact, the country’s debt situation has begun to improve as a result of China’s regulatory sweep to fight against shadow banking.

The Chinese government clearly understands the country’s debt problem and has taken an array of measures to hedge debt risks. According to a new study by Yu Yongding, a senior fellow with the Chinese Academy of Social Sciences, credit to the non-financial sectors in China has stopped growing since the second half of 2016.

China’s leverage rate in the corporate sector fell 2.4 percentage points in the first quarter of 2018 from a year ago, according to Liu Shijin, vice president of the China Development Research Foundation. Last year, the figure was reduced for the first time since 2011. China has made steady progress in deleveraging and the country “has entered a stage of stable leverage,” Liu was quoted by the Economic Daily as saying Thursday.

China’s debt has risen dramatically in the past decade. Concerns over China’s possible debt crisis are to some extent a reflection of Western inertia when it comes to the study of the Chinese economy.

It is understandable that the country’s debt problem has once again triggered widespread concerns among Western observers who worry about China’s defensive capability amid the trade war initiated by the US, but China’s economy is seeing encouraging signs.

In recent weeks, a string of newly released economic indicators showed the previous campaign to clamp down on financial risks has achieved some positive results. Such efforts strengthen China’s defensive capability against a trade dispute with the US and give China more leeway in launching an attack.