Beautiful Virgin Islands

Tuesday, Jul 22, 2025

Coronavirus has lit the fuse on a time bomb in China’s economy: debt

Coronavirus has lit the fuse on a time bomb in China’s economy: debt

Beijing has a tough choice to make: tolerate an unprecedented hit to the economy or go for massive stimulus and risk explosive consequences. It should beware, a financial virus can be every bit as toxic as a biological one

The coronavirus outbreak has already taken a great toll on the Chinese economy, with all headline readings pointing towards a record slowdown in growth during the first two months of the year.

But there is an even greater danger for what was once the world’s fastest-growing major economy: that Covid-19 will become the catalyst that will bring its many long-simmering problems to the boil. At the centre of these problems is a rising systemic risk in its banking and financial systems caused by a high level of debt accrued over the past decade.

The outbreak could not have occurred at a worse time. The past 10 years have not only seen the economy saddled with this debt, but it has also involved a steady structural slowdown that last year saw the growth rate fall to 6.1 per cent, the lowest in decades. Now, just at the very time the country might consider spending more to prop up that growth rate, a raging pandemic means it will be making much less money than usual.

The latest data from the Chinese Ministry of Finance shows fiscal revenue plunged by 9.9 per cent in the January-February period, the steepest drop since 2009. Overall tax revenue fell 11.2 per cent, driven by a 19 per cent slump in value-added tax (VAT) revenue, the main source of fiscal income. These drops come just as the government has offered a handsome tax cut in response to the pandemic.

Meanwhile, the escalation of the pandemic in the rest of the world will only further weigh on China’s economic growth, corporate profits and personal income. In turn, this will inevitably drag down government revenue in months to come.



Beijing’s proposed stimulus spending will only exacerbate China’s already-massive debt pile, which had reached 310 per cent of gross domestic product by the end of last year, according to the Institute of International Finance. Many economies that have experienced such levels of debt have gone on to suffer a financial crash or economic crisis. China now accounts for about 60 per cent of the US$72.5 trillion emerging market debt.

A deleveraging campaign had reduced Beijing’s debt mountain in 2018. But it has since returned to credit-driven stimulus to support growth and combat the effects of its trade war with the United States.

About 80 per cent of China’s debt stock was accumulated over the past decade as the country strived to achieve the politically significant milestone of doubling its economic sizefrom 2010 to 2020. The milestone was a key goal in President Xi Jinping’s Chinese dream of “national rejuvenation”.

While the coronavirus threat has receded in China itself, any hope of an early recovery is forlorn as Covid-19 is still ripping through the major developed economies – essentially, China’s customers and trade partners. Plunging demand from abroad will create a second shock wave that will hit China’s export-oriented economy just as it is recovering from the first shock of having to lock down its cities.

China’s balance sheet will be hit by both dwindling revenue and a spiralling demand for spending. Rising corporate debt, surging local government borrowings, and soaring non-performing loans for commercial banks are three areas that could wreck its fragile financial and banking systems. The non-financial corporate debt-to-GDP ratio jumped from 93 per cent in 2009 to 153 per cent last year, one of the highest in the world. The Institute of International Finance warned that China was the major driver of global non-financial corporate debt. China’s bond defaults also hit records in 2018 and 2019.



Meanwhile, China’s local government debts will jump as a result of more infrastructure-driven stimulus. This will add to a debt pile already worth up to 40 trillion yuan – about 40 per cent of the country’s 100-trillion-yuan GDP last year. S&P Global Ratings has singled out local government financing vehicles as being chiefly responsible for the accumulation of hidden debt. At issue is that while local governments want to spend more, their income from land sales, the main source of local fiscal revenue, is decreasing. The Ministry of Finance said revenue from land sales, which are off-budget, fell by 16.4 per cent in the first two months of the year.

China’s commercial banks also face a severe test as bad debts are likely to rise. Even before the outbreak, China’s banking system was a ticking time bomb, with the state having to step in to rescue a string of embattled medium-sized lenders. A Financial Stability Report released by the People’s Bank of China at the end of last year described 586 of the country’s almost 4,400 lenders as “high risk”. Data from the China Banking and Insurance Regulatory Commission shows there has been a steady rise in the non-performing loan balances of commercial banks since the middle of last year, a result of Beijing scaling back itsdeleveraging campaign.

China’s policymakers face a difficult choice: tolerate an unprecedented slowdown or go for massive stimulus and risk detonating a financial time bomb.

China’s economic planners have a habit of relying on massive levels of debt-financed stimulus whenever growth slows. The closed nature of its financial system affords policymakers the luxury of complacency, as they have a war chest of US$3.1 trillion in foreign exchange reserves.



All the signals suggest this is what they will do once more, despite the risk. Leaks suggest Beijing has amended its 2020 budget to raise the deficit to 3.5 per cent of GDP from an original cap of 3 per cent to fund this massive stimulus. Analysts say the actual fiscal deficits could jump much higher than last year’s 4.9 per cent, which included off-budget sheet borrowing and spending. Indeed, a meeting of the politburo, China’s top decision-making body, on March 27 suggested scaling up the stimulus package, with calls to raise the fiscal deficit ratio, increase issuance of Special Treasury bonds, and raise the quota of local government special bond issuance. Policymakers have also directed commercial banks to tolerate a higher threshold for bad loans, hoping to keep thousands of small and medium-sized enterprises from collapsing. The government has already sped up the issuance of bonds. The issuance of special-purpose bonds almost tripled to 950 billion yuan in the first two months of 2020, compared with last year.

It is to be expected that China’s debt will rise substantively in coming months, as in all previous crises. However, Beijing should beware that this time its fiscal measures will be limited. They will help only the country’s internal issue of supply and do nothing for external demand. China should exercise extreme caution: a financial virus can be as toxic, contagious and lethal as a biological one if it is allowed to spread.

Newsletter

Related Articles

Beautiful Virgin Islands
0:00
0:00
Close
UK Government Considers Dropping Demand for Apple Encryption Backdoor
Severe Flooding in South Korea Claims Lives Amid Ongoing Rescue Operations
Japanese Man Discovers Family Connection Through DNA Testing After Decades of Separation
Russia Signals Openness to Ukraine Peace Talks Amid Escalating Drone Warfare
Switzerland Implements Ban on Mammography Screening
Japanese Prime Minister Vows to Stay After Coalition Loses Upper House Majority
Pogacar Extends Dominance with Stage Fifteen Triumph at Tour de France
CEO Resigns Amid Controversy Over Relationship with HR Executive
Man Dies After Being Pulled Into MRI Machine Due to Metal Chain in New York Clinic
NVIDIA Achieves $4 Trillion Valuation Amid AI Demand
US Revokes Visas of Brazilian Corrupted Judges Amid Fake Bolsonaro Investigation
U.S. Congress Approves Rescissions Act Cutting Federal Funding for NPR and PBS
North Korea Restricts Foreign Tourist Access to New Seaside Resort
Brazil's Supreme Court Imposes Radical Restrictions on Former President Bolsonaro
Centrist Criticism of von der Leyen Resurfaces as she Survives EU Confidence Vote
Judge Criticizes DOJ Over Secrecy in Dropping Charges Against Gang Leader
Apple Closes $16.5 Billion Tax Dispute With Ireland
Von der Leyen Faces Setback Over €2 Trillion EU Budget Proposal
UK and Germany Collaborate on Global Military Equipment Sales
Trump Plans Over 10% Tariffs on African and Caribbean Nations
Flying Taxi CEO Reclaims Billionaire Status After Stock Surge
Epstein Files Deepen Republican Party Divide
Zuckerberg Faces $8 Billion Privacy Lawsuit From Meta Shareholders
FIFA Pressured to Rethink World Cup Calendar Due to Climate Change
SpaceX Nears $400 Billion Valuation With New Share Sale
Microsoft, US Lab to Use AI for Faster Nuclear Plant Licensing
Trump Walks Back Talk of Firing Fed Chair Jerome Powell
Zelensky Reshuffles Cabinet to Win Support at Home and in Washington
"Can You Hit Moscow?" Trump Asked Zelensky To Make Putin "Feel The Pain"
Irish Tech Worker Detained 100 days by US Authorities for Overstaying Visa
Dimon Warns on Fed Independence as Trump Administration Eyes Powell’s Succession
Church of England Removes 1991 Sexuality Guidelines from Clergy Selection
Superman Franchise Achieves Success with Latest Release
Hungary's Viktor Orban Rejects Agreements on Illegal Migration
Jeff Bezos Considers Purchasing Condé Nast as a Wedding Gift
Ghislaine Maxwell Says She’s Ready to Testify Before Congress on Epstein’s Criminal Empire
Bal des Pompiers: A Celebration of Community and Firefighter Culture in France
FBI Chief Kash Patel Denies Resignation Speculations Amid Epstein List Controversy
Air India Pilot’s Mental Health Records Under Scrutiny
Google Secures Windsurf AI Coding Team in $2.4 Billion Licence Deal
Jamie Dimon Warns Europe Is Losing Global Competitiveness and Flags Market Complacency
South African Police Minister Suspended Amid Organised Crime Allegations
Nvidia CEO Claims Chinese Military Reluctance to Use US AI Technology
Hong Kong Advances Digital Asset Strategy to Address Economic Challenges
Australia Rules Out Pre‑commitment of Troops, Reinforces Defence Posture Amid US‑China Tensions
Martha Wells Says Humanity Still Far from True Artificial Intelligence
Nvidia Becomes World’s First Four‑Trillion‑Dollar Company Amid AI Boom
U.S. Resumes Deportations to Third Countries After Supreme Court Ruling
Excavation Begins at Site of Mass Grave for Children at Former Irish Institution
Iranian President Reportedly Injured During Israeli Strike on Secret Facility
×