China’s Debt-to-GDP Ratio Climbs to Record 287.8% in 2023

05 Feb 2024

China’s debt-to-GDP ratio climbed to a new record high in 2023 despite the slow pace of borrowing, reflecting the economy’s weakening growth, a new report from a state-backed think tank shows.

The macro leverage ratio, which measures total outstanding nonfinancial debt as a share of nominal GDP, rose to 287.8% in 2023, 13.5 percentage points higher than a year ago, according to a report by the National Institution for Finance and Development (NIFD).

The expansion of the overall leverage ratio has outpaced the pace of borrowing. Total liabilities of household, corporate and government sectors expanded at a slower pace of 9.8% in 2023, largely unchanged from 2022 and remained at a relatively low level, according to the report.

The debt ratio held by households rose 1.3 percentage points to 63.5% while that of non-financial corporates increased 6.9 percentage points to 168.4%. The government debt ratio, meanwhile, expanded 5.3 percentage points to 55.9%.

“The limited debt expansion and significant rise of macro leverage ratio in 2023 is mainly due to the slowdown in nominal economic growth,” said the NIFD.

China’s real GDP growth, which is adjusted for inflation, beat the government’s target to grow at 5.2% in 2023. But its nominal growth dipped to 4.6% from 4.8% in 2022, the lowest level in nearly three decades, reflecting mounting deflationary pressure on the economy.

The fact that nominal GDP growth is lower than real GDP growth “suggests China is likely growing below its potential growth,” Zhang Zhiwei, chief economist of Pinpoint Asset Management Ltd., wrote in a note. “More supportive fiscal and monetary policies would help China to restore its growth potential.”

The NIFD also called for greater policy support to invigorate domestic demand and spur growth. Debt growth below 10% suggests insufficient financing demand in the private sector, affecting consumption and investment expenditure, the NIFD said. A further decline in debt growth will have a more serious impact on the economy, the report said. The only solution to control the leverage ratio is to expand effective demand and push up the nominal GDP growth, it said.

The NIFD estimated that if total borrowing expands by 10% and nominal GDP grows by 5% in 2024, China’s macro leverage ratio will increase further by 14 percentage points to exceed 300%.

The government should set the nominal GDP growth target at 7% and commit to more stimulus if the goal is not met, said the NIFD. Doing so would effectively reverse market expectations and spur economic recovery, it said.

To boost nominal GDP growth, the report suggested maintaining the fiscal deficit at a certain level, with the central government borrowing more to help local authorities reduce their debt burdens. The report also called for interest rate cuts to lower financing costs and coordinated stimulative fiscal policy to support the economy.