China's debt to GDP ratio rises further to 317% this year

Even as China is poised to register a positive economic growth rate for 2020 amid an imminent global recession with most countries set to dive into the negative territory, President Xi Jinping’s economic worries are mounting. The country’s debt to gross domestic product (GDP) ratio has risen to 317 per cent from 300 per cent in the year ago period.

According to the Institute of International Finance (IIF), China’s debt-to-GDP ratio saw a record quarterly increase in the first quarter of 2020, jumping to over 317 per cent—“an eye-watering 17 percentage points higher than 2019.” This would be particularly worrying for Xi as several countries which have been receiving financial assistance from China have started the exercise of restructuring loans that mature this year.

This essentially means that China will not be able to get back the money it invested. On top of that, China registered a 6.8 per cent contraction in the first quarter of the current year—the first time since 1992—the year when it started recording quarterly growth figures coupled with unprecedented rise in unemployment.

What has surprised many economists is the fact that China’s high debt-to-GDP ratio has not raised rating agencies’ hackles. D.K. Srivastava, chief policy advisor, EY India, told IN that while China has escaped the agencies’ scanner until now, the party may be short-lived.

“Until now the country has had huge trade surplus and this could be one of the main reasons that it did not come under the rating agency scanner. But now as defaults keep rising, this aspect may come under the spotlight,” he said, adding that China until now has primarily relied on internal borrowing rather than external.

“Since China’s external borrowing has not been very substantial, the rating agencies have not taken note of this aspect,” Srivastava pointed out.

Beside this, policy analysts said that the information within the country is suppressed.

The IIF said that China’s total debt hit 317 per cent of GDP in the first quarter of 2020. “The rise in China’s total debt in the years since the 2008 global financial crisis has been unprecedented, from around 172 per cent of GDP to over 300 per cent in 2019. This rapidly escalating leverage has been a major engine of global growth—but has also accounted for more than 40 per cent of the rise in global debt since 2007,” a report by IIF said, adding that the dragon nation is currently the world’s largest creditor to low income countries.

https://www.iif.com/Portals/0/Files/content/1_200514%20Weekly%20Insight.pdf

China’s much-hyped debt-trap diplomacy started with the Belt and Road initiative (BRI), referred to as One Belt One Road (Obor) earlier. Countries such as Pakistan, Zambia, Djibouti, Republic of Congo, Maldives, Tonga, Laos and Kyrgyzstan, which received financial assistance from China, are running out of steam, hit as they are by the economic uncertainty. Economists have expressed their concern as worries over timely repayment mounts stating that the dragon nation could be falling in its own debt diplomacy trap..