Article posted: 18th April 2012

For those that think the crisis of debt is a European one, it is sobering to note that US debt, as a percentage of gross domestic product (GDP), is higher than the average in the European Union (92% compared with 61%, according to the World Economic Forum). And those who think that the crisis is a western one need look no further than Japan, where government debt is 220% of GDP. Chinese debt, on the other hand, is less than 18% of output. So on the surface the Chinese Government can afford a degree of self-satisfaction.

 In Europe, government debt ballooned as accelerated public spending spearheaded efforts to avoid the worst effects of a banking crisis. UK debt stood at 64.2% of GDP in January (up from 40% in 2007).

 The Chinese response to a slowing global economy in 2008 was less direct but no less dramatic. Local governments were told to boost spending on infrastructure projects. Special purpose vehicles were formed and borrowed from the big four state-owned banks, which in turn were instructed to massively expand the credit available for such projects. As a result, Chinese expansion continued at breakneck speeds when growth faltered elsewhere.

Unfortunately, many of these projects are unlikely to be profitable and the loans on which they are built will not be repaid. That will leave the banks with a stock of non-performing loans requiring central government bail-outs similar to those in the West. Quite how large this stock of bad loans might be is a matter for debate – official data is less than comprehensive. It seems likely the authorities have ample resource to contain any associated problems for now. But, at the very least, this stock of bad debt will severely limit the ability of the state to similar stimulus in the future.