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Does China Still Have a Debt Problem?

This briefing explains the origin, rise, and implications of China’s persistent domestic debt problem. With its $588 billion economic stimulus package during the 2008-09 global financial crisis, China’s government attempted to shore-up domestic infrastructure investment and offset the effects of diminishing global demand for its exports. To do so, Chinese authorities made new capital available and relaxed borrowing requirements for many local firms, most of which were state-owned enterprises (SOEs). These SOEs did not use the newly borrowed capital as efficiently as their private sector counterparts, resulting in overinvestment (e.g., steel and aluminum sectors), low investment returns, and frequent defaults. This misallocation of capital and surging debt in 2009-16 increased China’s financial risk exposure and inhibited China’s economic growth potential, as funds were increasingly diverted from new investment to debt servicing. Through strict policy measures, Chinese authorities have arrested the growth of debt in 2017, lowering China’s high financial risk exposure. However, the persistently large stock of corporate (and now household) debt is still likely to inhibit China’s long-term economic growth and affect U.S. firms.