How debt differs in China, the US and Japan

By Dan Steinbock
0 Comment(s)Print E-mail Shanghai Daily, January 11, 2017
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Unlike advanced economies, China remains better positioned to overcome its debt challenges. In recent months, China has managed to stabilize growth. Nevertheless, stabilization has required capital controls, continued lending and repeated interventions. Some observers have concluded that China has opted for a path that proved so costly to Japan in the 1990s and the US in 2007. Yet, realities are a bit more complex.

Certainly, Chinese credit surge has been extraordinarily rapid in historical terms. In 1994, Japan's plunge was preceded by decades of lending. In 2007, the US recession was fueled by a massive debt pile that had accrued in three decades. In China, debt involves local government debt, which accumulated after the 2009 stimulus package.

During the Great Recession, China's huge stimulus boosted confidence, supported the infrastructure drive, and prevented a global depression. But excessive liquidity led to speculation in equity and property markets.

As lending continues to boost state-owned enterprises (SOEs), China's private debt to gross domestic product (GDP) ratio surged to 205 percent in 2015, which exceeded the ratio in the US (166 percent) and came close to Japan (214 percent). These figures should be understood in the context, however. Since China's government debt is low (16 percent), its total debt was less than that in Japan (281 percent) and the US (247 percent).

The most far-reaching differences, however, involve different levels of economic development.

Japan and the US are advanced economies, which enjoy relatively high living standards, but suffer from low growth and secular stagnation. China is an emerging economy and its growth rate remains over 3 times faster than that of the US and its growth potential remains substantial in the next 5-15 years, given peaceful regional conditions.

Domestic savings rate is vital cushion in times of deleveraging. In the past four decades, Japan's savings rate has plunged dramatically (from 40 percent in 1970s to 18 percent today).

Recently, it has enjoyed trade surplus, but only after substantial depreciation of the yen. In the US, domestic savings rate is low (17 percent) and the country has run trade deficits for 40 years. In China, the reverse prevails. Until recently, savings rate has been relatively high (close to 50 percent), and trade balance remains on the surplus.

Total internal debt must also be seen in the light of external debt (foreign debt), which is the total debt a country owes to foreign creditors. In emerging markets, high external debt has typically triggered major crises. Yet, China has little external debt (8 percent to GDP), unlike the US (100 percent) or Japan (171 percent). Unlike major advanced economies and other large emerging economies, China is also seeking to reduce its debt pile, by converting short-term bank debt into long-term bonds and redirecting credit to the private sector and households.

Nevertheless, China can no longer rely on credit-fueled growth. China's current credit target (13 percent) remains twice the growth rate (about 6.7 percent). As long as the gap between credit-taking and growth rate is substantial, it will continue to penalize the quality of growth.

Dr Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see

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