China’s Debt to GDP Nears 300%

China’s remarkable growth in GDP has provided a large boost to global growth over the years. As the global economy and trade recovered from the global financial crisis in 2009 and 2010, China was major contributor in reversing the global down turn and lifting GDP higher.

It's no secret anymore that the real reason, China has been able to rebound so strongly in the last seven years, was because China has accumulated a record amount of debt to fuel its own GDP growth and keep demand for global trade strong, Investing.com reported.

Now that total debt to GDP is approaching 300% in China, its starting to become a drag on the largest economy in the world. As the economy continues to slow due to its debt bubble impacting growth, it increases the risk that China will actually threaten global growth as it deals with its own debt crisis.

From 2004 to 2008 period, the debt to GDP ratio was stable and moving sideways at around 175%. This indicated that the economy was growing in sync with the level of debt growth within China’s economy, which is a healthy sign of a growing stable economy despite at the time debt to GDP was high.

However, from 2008 to 2016, the debt to GDP started to increase for the first few years and then accelerated as it approached 2012 over the next 4 years to 2016. This trend is not a healthy sign for China’s economy, as this indicates that the GDP growth has been unable to keep up with the level of debt taken on within the economy.

If debt is growing faster than GDP, the debt stops becoming a contributor to growth and instead starts to drag on growth especially as debt to GDP ratio accelerates.

Debt Crisis to Affect Global Growth

Now that the debt has become a major problem in China, there have been a number of people and international groups including the Bank of International Settlements, Bank of England and National Australia Bank among others, who have raised concerns over the growing risks that China’s debt bubble poses on the global economy.

According to Reuters, 25% of Chinese companies profits in the first half were not high enough to service their debts and make their interest payments.

China’s debt crisis and its subsequent slowdown within its own economy, is coming at an inconvenient time for the global economy. Many countries including the US economy are starting to experience a slowdown as recent economic indicators highlight the slowdown in global growth.

Within the US, it’s becoming more apparent that the US economy is about to experience a recession or may already be in a recession unofficially.

Export Drop Narrows

China's exports growth narrowed from previous drops in October while imports accelerated growth, however weak global demand might weigh on future trade growth, Xinhua reported.

Exports measured in yuan fell 3.2% year on year in October, a slower pace of decline than the 5.6% fall in September, while imports in yuan rose 3.2%, up from 2.2% last month, according to figures from the General Administration of Customs on Tuesday.

Stripping out the impact of yuan depreciation, exports in US dollar terms fell 7.3% year on year in October while imports slipped 1.4%.

China's trade surplus in dollar terms was about $49 billion, up from $42 billion in September. The surplus is in contrast to a larger-than-expected decline of $45.7 billion in China's foreign reserves in October, indicating quicker capital outflows in the month.

Foreign trade with China's largest trade partner the European Union and the third largest one ASEAN gained year on year in the first ten months, while it dropped with the United States, its second largest trade partner.