China’s debt is beyond worrying. It’s credit-to-GDP gap, a measure employed by the Bank of International Settlements (BIS) as a way to gauge debt levels, stands at 30%. This is the highest of any country going back to 1995 and is three times the threshold the BIS uses as an early sign of unsustainable debt.
The government has a plan to help ailing companies burdened by heavy debt levels. They will be allowed to give their creditors equity stakes in their companies in return for reducing debt. But while this may seem like a solution to the growing debt crisis, it is no more than a temporary lifeline.
China needs real market reform to avoid a debt crisis. Companies undergoing difficulties need to be restructured, hard budget constraints imposed, and losses and unprofitability revealed.