China’s debt reduction like putting the ‘genie back in the bottle’, but can it succeed to aid the economy?
- While China’s economy has largely recovered from the impact of the coronavirus, its debt surged to 280 per cent of gross domestic product (GDP) in 2020
- China is still building infrastructure projects, but Beijing is now setting the bar higher amid historically high debt levels
This is the third part in a series of stories looking at China’s economic outlook in the second half of 2021 as it continues its recovery from a coronavirus-hit 2020.
China has long relied on the old playbook of investing in infrastructure projects to boost its economy, particularly its high-speed railway network that is the largest in the world. And Beijing even said at the start of the year that its high-speed rail network could nearly double in size over the next 15 years.
Projects are still being built in major cities – like the second phase of the mass transit network Foshan city in Guangdong province costing 77.21 billion yuan (US$12 billion) – but Beijing is now setting the bar higher.
China's debt-to-GDP ratio
| Year | Debt-to-GDP ratio |
|---|---|
| 2020 | 279.4% |
| 2019 | 255.9% |
| 2018 | 249% |
| 2017 | 252% |
| 2016 | 248.6% |
Source: People's Bank of China
Beijing is well aware that high levels of debt reduce leeway for the economy to grow and pose a significant risk to China’s financial system and economy.
These efforts to reduce debt are expected to put downward pressure on Chinese growth in coming years, meaning without the option to turn to a one-size-fits-all strategy to cut back debt growth given the disparities in regional economies, the government has to tread carefully with its remedies.