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Beijing's Debt Dilemma

Why China's Bubble Is a Threat to the Global Economy

A plastic pipe factory in the Xiong'an New Area, in China's Hebei province, April 2017. Jason Lee / Reuters

China’s ballooning corporate debt remains the number one systemic risk to global economic recovery. If the bubble bursts, it will drag down the rest of the world while compromising Chinese Premier Xi Jinping’s grip on power ahead of the Chinese Communist Party congress late in the year. Beijing understands that the debt is hardly sustainable, so over the last two years it has engineered a sophisticated macroeconomic strategy to artificially boost factory prices, increase profits, and ease loan repayments for the most troubled companies. But as economist George Magnus put it, “you can’t resolve a debt problem peacefully.” 

Chinese corporate debt is approaching dangerous levels by both historical and cross-country standards. At around 170 percent of GDP, China’s corporate debt rate is the highest in the world. Moreover, the so-called credit gap, which measures how fast credit is growing with respect to the economy, currently stands at 30

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