Global debt has expanded at an unprecedented pace this year as a result of the Covid-19 pandemic. China and the United States are the biggest contributors to the rapid debt accumulation respectively among emerging markets and developed economies. Their heavy exposure needs to be addressed if the so-called debt tsunami doesn’t overwhelm the world economy, especially for developing countries that have proved to be the most vulnerable. According to a new analysis by the Institute of International Finance, which represents worldwide financial institutions, the total level of global indebtedness will reach a whopping US$277 trillion by the end of this year. This will represent 365 per cent of global gross domestic product, an alarming surge from 320 per cent from a year ago. Debt burdens are especially onerous for emerging markets. Since the start of the pandemic, major central banks led by the US Federal Reserve have cut interest rates towards zero and pumped monetary stimulus into the world economy. Meanwhile, the collapse in tax revenues has made emerging market debt especially hard to service. As the cost of borrowing drops, companies and governments are borrowing to tide them over the crisis. That tidal wave of liquidity and tsunami of debt is what the institute is warning against. Thanks to massive liquidity, global stock markets have lifted many key indexes to records, arguably far exceeding many firms’ earnings. The rise in emerging market debt was driven by a surge in non-financial corporate debt in China. Excluding the Chinese economy, the US dollar value of debt in other emerging markets actually declined this year, reflecting the falling value of their currencies. This year may set another record for China’s debt issues and also bond defaults. Last month alone, three state-owned firms defaulted on bonds – energy company Yongcheng Coal and Electricity, carmaker Brilliance Auto Group, and chip maker Tsinghua Unigroup. As the health crisis subsides, the nation’s debt problem is back on the agenda. Beijing is nervous about both state-owned and private firms missing payments. On the one hand, policymakers need to stop mollycoddling unworthy companies that have squandered financial lifelines. On the other, they need to prevent widespread defaults hurting the overall financial system. Beijing is right to consider the national debt, which exceeded 300 per cent of GDP last year, as a threat, but reining in borrowing may also create more debt defaults. Policymakers have a tough balancing act to perform. Meanwhile, US domestic debt will reach US$80 trillion this year, from US$71 trillion a year ago. This accounts for nearly half of the global debt held by advanced economies. Two of the world’s largest economies need to put their own houses in order to save themselves and the global economy from ruinous consequences down the road.