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Three Threats to China’s Economy

China's economy is facing serious challenges, reflected in trends like falling fixed-asset investment and rising credit. But many of those challenges can be addressed with one major initiative: reform and restructuring of the state sector.

SHANGHAI – After a decades-long “growth miracle,” China’s economy has lately become a source of mounting concern. Some factors – from high corporate debt to overcapacity in the state sector – have received a lot of attention. But three less-discussed trends point to still other threats to the country’s economic growth.

First, despite the decline in GDP growth, total social financing – and especially bank credit – has increased. This relates directly to China’s debt problem: the continual rolling over of large liabilities creates a constant demand for liquidity, even if actual investment does not increase. Such “credit expansion” – which is really just rolled-over debt – is not sustainable.

Clearly, the debt issue must be addressed. And the Chinese government has been working to do so, implementing policies aimed at supporting debt restructuring. For example, the central government has helped local authorities to replace CN¥3.2 trillion ($471.9 billion) of risky debt in 2015, and an expected ¥5 trillion this year. Its corporate debt-for-equity swap plan could augment the impact of these efforts.