Reform to help China weather any debt crisis

According to a recent Institute of International Finance report, the global debt-to-GDP ratio hit an all-time high of 322 percent in the third quarter of 2019－rising nearly $10 trillion year-on-year to $252.6 trillion.

Global debt is likely to rise further in 2020, spurred by low interest rates worldwide and easy financial conditions. The rising debt-to-GDP ratio poses a bigger challenge to economies, especially emerging economies, which face debt servicing and refinancing problems.

The accumulation of debt by some economies to fuel economic growth led to three major financial crises－the Latin American debt crisis in the 1980s, the Asian financial crisis in the late 1990s and the 2008 global financial crisis. To sustain economic growth in the aftermath of the 2008 crisis, developed economies adopted long-term quantitative easing policies, and the liquidity they released flowed into other economies raising the debt level of the latter and unleashing a global debt wave which increased the risk of a global debt crisis.

A recent World Bank report warned that most developing countries are debt-driven and, ironically, need more debt to sustain their growth. There is an inherent contradiction in the debt-driven growth model: to ensure economic growth, a country has to increase its debt, which increases risks and could ignite a debt crisis.

China, too, accumulated a lot of debt after 2008, but in recent years the Chinese government has taken measures to rein in debt growth by channeling new debt into the most efficient sectors. Such a policy will not only minimize risks but also facilitate high-quality growth. And unlike developed economies, China can create new growth drivers through structural reform rather than risk another bout of monetary stimulus.

China is also one of the few countries to implement structural reforms and take measures to guard against financial risks. Local governments and the market have chosen a new development path that does not rely on monetary easing, while making greater efforts to strengthen competitiveness through high-quality economic development. Which would help China to deal with a global debt crisis in the future.

21ST CENTURY BUSINESS HERALD