Signup for our free newsletter:

China's Debt Crisis

Written By Brian Hicks

Posted October 21, 2013

Chinese politicians have been pointing their fingers at the United States this past week, ridiculing it for the way it handles its financial affairs. But it may need to put that finger away because it seems China may not be in the best financial shape either.

The United States has the largest economy in the world, and China has the second largest. And it may have followed the United States in its money management – as much as it would never want to admit that.

ChinaChina’s debt is quickly getting out of control. It’s depended on credit and stimulus repeatedly. Just like the United States, it has been using more than it has and employing stimulus measures to recover the economy.

Economists from CNNMoney estimate debt could have reached as much as 19.7 trillion yuan last year. This is almost one-third of the gross domestic product. It’s also double what the debt was three years ago.

The amount of debt China has accumulated isn’t what is worrisome; it’s the quickness with which it is growing. Actually, its debt is much lower than other countries such as the U.K., France, Japan, and Spain.

The problem is this rising debt is going to be difficult to slow down. The economy has depended on this extra “funding” so long, and to cut it down would mean having to restructure the way it’s been running the government. That’s not the easiest task, as we have seen in the United States’ recent financial debacle.

Not only that, but China’s growth depends on that funding. Without it, the nation will struggle to maintain its level of growth, and that is earth shattering for the country and the global economy.

Emerging economies aren’t happy with China’s current debt problems because they know there will be a time when the nation will have to scale back, and that can be detrimental to them. Most of what China depends on is its exports. If China ends up looking for additional funding, it will seek it from its exports by raising prices. When prices rise, emerging economies must either deal with it or back out – not exactly the ideal situation for any of them.

It’s definitely not the right choice right now. Export growth has slowed significantly. In September, exports dropped .3% year over year, even with one of the largest of exports, electronics, still being needed just as much as ever. It’s no wonder China has recently tried to have a larger global role through investments.

The Chines government has been trying to find more investors, as this is another way to bring money into the country. It recently made a deal with the U.K. to allow investors to buy shares and bonds through London banks and financial institutions. Hong Kong used to be the only way for investors to do this before.

Investing in China

Does this mean you should take advantage of this investment ease?

Probably not. Keep in mind, China isn’t fueling the economy with the yen; it’s fueling it with credit. As the country’s debt increases, it will come to a point when it can’t keep borrowing or throwing money into its economy. At that time, things will decline, and they will do so quickly.

Does that mean you should take your money out if you’ve already invested in China? No. Wait just a bit more, because the perils of China haven’t started yet. You’ll continue to see a return for a bit longer, and there’s no point in cutting that too soon. Once the economy starts to suffer from the government’s money management – which you will see coming as long as you pay attention – that’s when you should pull out.

If you’re adamant about investing in China, the best thing to do right now may be to see where the country is investing. There’s no denying China loves its investments, and it wouldn’t be investing if it didn’t feel it would make a profit.

One of the most recent investments is in British nuclear power. Chinese firms recently bought stakes to help push the construction of the new reactors. Britain hopes to have 12 new reactors by 2030.

Keep an eye out for additional investments. China’s investments are usually outside of its own country for a reason, and that’s why you should consider them.


If you liked this article, you may also enjoy: