Chart of the Week: Mounting debt weighs on Chinese government finances

The Chinese economy is either in or very close to recession, which raises the prospect of fiscal stimulus: but can China afford it? Its fiscal position has deteriorated steadily since the Global Financial Crisis of 2008/09, which was when its export-oriented growth model stopped working. Since then growth has been built on credit, to support investment in industry, infrastructure and, above all, housing; but growth has slowed nevertheless. The slowdown has put increasing pressure on government finances, peaking during the first COVID outbreak of 2020; the deficit is on track to exceed 10% of GDP within the next few years. The worsening deficit has caused the government debt to GDP ratio to rise too, touching 70% of GDP on official measures (chart below). Fathom’s proprietary measure of Chinese GDP (the China Momentum Indicator, or CMI) suggests that the ratio of debt to GDP is even higher, at 80%; and if one includes the bad assets in the banking sector, which, in Fathom’s view, the Chinese government has implicitly underwritten, China’s debt stock may exceed 100% of GDP — equivalent to the UK, the US and much of the euro area. China is unlikely either to engage in fiscal austerity during a downturn or to default on its government debt. Much more likely, it will follow in the footsteps of the advanced economies, with quantitative easing and debt monetisation. For that reason, Chinese government debt remains a long-term buy/hold asset in our view.

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