China’s Great Wall Of Debt

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What's going on here?

Uh oh! Moody’s, a major credit ratings agency, put China’s economy in the spotlight for investors on Wednesday after it said that rising debt levels in the country made it a riskier place to invest.

What does this mean?

Just like we all have our own personal credit ratings, governments have their creditworthiness rated, indicating how likely it is that their lenders will be paid back. Late on Tuesday, Moody’s announced that it was downgrading its rating for the Chinese government.


It warned that debt levels just keep going up in China, in part because the Chinese government has stimulated economic growth by making it easier to borrow money. Moody’s fear is that the government will continue to encourage more borrowing in order to maintain China’s relatively high economic growth. Partly because so many big companies in China are state-owned, doing so would increase the government’s debt burden (and thus hurt its creditworthiness).

Why should I care?

For markets: Investors are already well aware that China has a lot of debt.

Moody’s point of view isn’t particularly original: various economists and investors have warned about China’s high debt levels in recent years (and some think it’s far more of a risk than Moody’s does). So the downgrade isn’t such a big deal for investors, but it is a reminder that investing in China has almost certainly gotten riskier in recent years.


The bigger picture: China is a complicated beast.

It can be difficult even for seasoned investors to figure out quite what is going on in China. Right now, the government is trying to restrict certain types of lending within the economy, and these new policies are a significant concern for many investors globally. But China’s economy performed reasonably well last year and, from a longer term perspective, it is trying to make its economy more reliant on industries that likely have greater potential for growth (like digital technologies rather than steel smelting).

Image source: maoyunping / Shutterstock.com
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