Abacus | Why China, like Japan, needn’t worry about paying all that debt back

With China’s total debt hitting 317 per cent of GDP, it looks destined to join Japan, Greece and Italy on the OECD and IMF’s ‘wall of shame’

But why worry when Modern Monetary Theory suggests its debts may never need to be paid?

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A bank employee counts 100-yuan notes at a bank in Shanghai. Photo: AFP

Published: 7:00am, 1 Jun 2020Updated: 7:00am, 1 Jun 2020

Major economies around the world are seeing their debt surge. For many years, Japan, Greece and Italy have topped the OECD and IMF’s “wall of shame”, and it appears they will soon be joined by China as the Institute of International Finance recently estimated China’s total debt hit 317 per cent of gross domestic product (GDP) in the first quarter of this year.

GREECE IS THE WAY WE ARE FEELING

No one likes the thought of being in debt. After all, it must be paid back. And seeing one’s national debt compared with GDP is depressing and worrisome – just ask the Japanese who have been confronted with eye-watering numbers for decades. As debt rises, it is natural to wonder how the Chinese and the Japanese will ever manage to pay it back. Raise taxes? Sell more cars, electronics and plastic crap? Perhaps not. A novel way of looking at it, called Modern Monetary Theory (MMT), suggests they may never have to.

I’m not a trained economist, although I studied some theory when I arrived in the City of London in the early 1980s. My career has been based more on observation, learning “on the job” and drawing conclusions from what I thought was sensible rather than what it said in the book.

With that in mind, opening the OECD report on Japan, I am troubled at seeing the chart of gross debt to GDP in Japan plotted against Greece’s (page 16 in its 2019 report), which suggests there is a comparison to be made. That doesn’t sit right, as we know that Japan is rich and Greece is poor.

The headquarters of the People’s Bank of China in Beijing. Photo: Reuters