China Gets A Warning

What's going on here?

An influential global economic organization, the OECD, reiterated a warning on Tuesday that investors have heard before: China has too much debt and that could threaten global markets.

What does this mean?

Partly in response to slowing economic growth, the Chinese government enacted a number of measures last year to boost its economy, including encouraging its banks to lend more money to companies (to foster their operations). This wasn’t the first time: the Chinese government’s response in the years following the 2008 financial crisis was to combine increased government spending (e.g. building more railways) with more lending within the economy.


The increased lending has led to debt levels in China hitting a historically high level. The OECD is worried that, if companies are unable to pay back all this debt, then it will imperil the Chinese banking system (e.g. banks that aren’t repaid could go bankrupt, disrupting new lending and hurting anyone that had lent the banks themselves money, like regular investors).

Why should I care?

For the markets: There are certainly risks for global markets stemming from China.

China is important on many levels: it buys a huge amount of products from other countries (e.g. German machinery), large multinationals have a big presence in the country (e.g. Apple) and, among other things, it’s a big importer of commodities (which is hugely important to the economies of Australia, Canada and other countries). Any major problems with China’s economy would be felt around the world.


The bigger picture: Warnings about China are not new.

Other international organizations and famous investors have been issuing similar warnings for years. Predicting when debt within China becomes a major problem is extremely difficult. It may not even become a problem; some investors point out that the Chinese state has lots of money and could bail out its banks if needed (much like the US government bailed out US banks in 2008). For now, this is a risk on investors’ radar, but it’s not consuming much attention.

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