China Debt Ratio Hits Record

China’s debt-to-GDP ratio reached a record high of 281.5% in Q2, reflecting a deep lack of confidence that is hampering economic growth. Despite the increase in total debt, household and corporate borrowing has slowed considerably, indicating a cautious “wait and see” approach amid uncertain economic prospects. This shift towards a more conservative financial stance raises concerns of a potential “balance sheet recession,” similar to Japan’s economic stagnation in the 1990s. This would involve a significant focus on paying down debt, thereby driving down consumption and investment. With households becoming more focused on their balance sheets and corporations hesitating to borrow for expansion, China’s GDP growth could be under threat, signaling potential economic instability. Additionally, the government’s efforts to decrease financial sector risks have resulted in a concerning shift in behaviour among households and firms, further intensifying economic uncertainty.