China's Debt Surge May Increase Risk of Financial Crisis

(Bloomberg) -- China’s debt is poised to soar over the next five years, severely reducing the chances the nation can avoid a financial crisis.

Bloomberg Economics economists Fielding Chen and Tom Orlik estimate China’s total debt will reach 327 percent of gross domestic product by 2022, double the level in 2008. That will put China among the most indebted countries in the world.

"The rapid growth and high level of China’s debt have already placed them in the danger zone for a financial crisis," said the economists in a note published Tuesday. "Adding debt equivalent to almost 70 percent of GDP in the next five years wouldn’t mean a crisis is inevitable, but it would severely reduce the chances of avoiding one."

Central bank Governor Zhou Xiaochuan, who has hinted he’ll soon retire, recently warned of the risks in company and household debt, saying that corporate borrowing was "very high" and that the nation needs to be on guard against excessive optimism that could spark a sudden drop in asset prices.

The Bloomberg estimates of future debt levels are based on a new model that assumes a moderate slowdown in growth, continued rebalancing of the structure of the economy toward services, a stabilization in the credit intensity of growth, and continued large-scale write-offs of bad loans.

Economic expansion is expected to slow to 5.8 percent in 2022 from 6.7 percent in 2016, the economists said. Nominal growth, more relevant for calculating the debt-to-GDP ratio, is expected to edge down to 7.9 percent in 2022 from 8 percent in 2016, they said.

To contact the editor responsible for this story: James Mayger at jmayger@bloomberg.net, Jeff Kearns

©2017 Bloomberg L.P.

With assistance from Bloomberg News