The announcement of China’s gross domestic product figures this week hinted at the unwinding of the greatest growth narrative in history. From 1980 to 2009, China expanded by an average of 10.1 per cent annually, transforming the world’s most populous country into its second-largest economy. Now though – Chinese officials said as they announced the slowest quarterly GDP growth rate since the global financial crisis – we should prepare ourselves for a “new normal” of slower expansion. This anodyne expression, however, camouflages an unsettling reality: there is nothing normal about the vast pit of debt from which China must struggle to emerge.
Total Chinese debt has virtually doubled since the financial crisis to around 240 per cent of GDP, according to Fitch, the credit rating agency. This means that debt service charges, assuming an average interest rate of 7 per cent, are set to reach about 17 per cent of this year’s prospective GDP, or $1.7tn. To put this number into perspective, it is likely that Chinese debtors – including its government, agencies, companies and individuals – will end up paying an interest bill that is not far off the size of India’s GDP last year ($1.87tn) and considerably larger than the economies of South Korea ($1.3tn), Mexico ($1.26tn) and Indonesia ($870bn).
More germane to China, though, is the drag that such debts exert on domestic dynamism. The burden of debt service – measured as a proportion of GDP – remained well below the country’s growth rate during the blistering period of Chinese “catch-up” growth from 1980 until 2009. Now, however, it stands at more than double the 7.3 per cent growth rate that the economy recorded in the third quarter. The implication of this is obvious: Chinese companies and individuals are increasingly preoccupied with repaying loans and correspondingly less inclined to invest or spend. In fact, the interest repayment burden has burgeoned so quickly that it now matches the $1.7tn that private companies invested in factories and equipment in the first nine months. It is also considerably more than the total invested so far this year on constructing and buying real estate.