China’s Debt-GDP Ratio Expected to Rise to 327% Over Next Five Years

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Bloomberg analysts expect China’s debt-GDP ratio to surge over the next five years, exacerbating the risk of a financial crisis.

Bloomberg Economics analysts Fielding Chen and Tom Orlik forecast that China’s total debt will rise to 327% of GDP by 2022, for a doubling compared to 2008 levels that will make the country one of the world’s most indebted economies.

The forecasting model developed by Chen and Orlik factors in a mild growth slowdown, steady credit intensity of growth, large-scale write-offs of bad loans, as well as a shift in China’s economic structure towards the services sector.

They see GDP easing to 5.8% in 2022 from 6.7% in 2016, as well as a decline in nominal growth to 7.9% from 8% across the same period.

According to the Bloomberg analysts this surge in debt will further worsen China’s already precarious financial health.

“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.

“Adding debt equivalent to almost 70% of GDP in the next five years wouldn’t mean a crisis is inevitable, but it would severely reduce the chances of avoiding one.”

The mounting pile of debt accumulated by China in the wake of the Great Financial Crisis is one of the chief concerns for market observers, prompting both Moody’s and Standard & Poor’s to downgrade the country’s sovereign credit rating earlier this year.

Other institutions are even more dour in their assessment of China’s leverage levels, with the International Institute of Finance estimating that the country’s debt-GDP ratio exceeded 304% as of May 2017.

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