OECD sounds the alarm on China’s soaring corporate debt (2024)

The recently released report by the Organization for Economic Cooperation and Development (OECD) titled “OECD Economic Surveys: China 2017 Report” paints an ominous picture of the threats facing China’s economy.

The OECD is particularly concerned with the high level of debt in proportion to overall GDP within China. Furthermore, the engines of investment and exports, which propelled the Chinese economy to world-leading rates of growth, are starting to run out of steam.

{mosads}The OECD reports outstanding debt within China exceeds GDP by 250 percent. The debt figure is comprised of corporate, governmental and individual debt. By any standard, this figure is very high. The largest component of debt resides in the corporate sector with total debt in excess of 170 percent of GDP.

The above figures indicate that instead of dialing back its credit-fueled growth, China has continued to rely on credit expansion as a means of meeting GDP growth targets. Over the past year, a good deal of this credit was injected into the state-owned sector as well as continued investment in infrastructure and related construction.

Realizing China’s high reliance on investment and exports to drive its GDP, reform-minded policymakers have tried to steer the economy in a different direction. Critics, both internally and externally, have cited the fundamental unsustainability of its growth model.

Much of the growth has been reliant on two things — debt and global demand for its exports. Excessive debt increases the overall risk within the economy with the consequential increase of default risk while the demand for China’s exports has lagged the supply of exportable goods.

To rebalance the economy, Chinese policymakers wish to emphasize a shift toward technologically-driven innovation over low-end manufacturing as the path toward sustainable growth. That China is currently caught in the “middle income trap” describes the limits of using cheap labor and conversion of raw materials as a driver of growth.

First off, labor is no longer cheap in China, and the costs of inputs and raw materials have escalated, placing limits on the reliability of this as a driver of growth.The OECD report indicates that much of the well-intentioned policy and incentives to accelerate technologically-driven innovation have fallen short of expectation.

For China’s leaders, it is much easier to talk about innovation than to achieve it in practice. While China has been leading the pack in filing patents, much of what has been patented is of little practical use or worthy of adoption. This state of affairs begs the question, can innovation be cultivated by governmental dictate or is innovation derived from a unique set of circ*mstances, both governmental and non-governmental?

Critics of China’s model of innovation cite the absence of intellectual property protection, a rigid educational system that emphasizes rote memorization, the lack of internet access and free flow of information and the vetting of ideas that in some manner “offends” conformist political ideology as barriers to intellectual thought and the pursuit of innovation.

To be fair, it is not as if China and the Chinese are not inventive people. Take a ride on their high-speed rail trains and you will marvel at the technology and innovation that was applied toward this famously splendid system of transportation. In many ways, large and small, China has made great leaps in technological advancement and material progress.

That being said, China also has a way to go if it is going to match the sheer inventiveness of the United States or Western Europe. If there is any bright spot in the Western economies, it is the ability of these economies to innovate and find new ways of doing things, creating new industries along the way.

It is the productivity gains that result from such innovation that have been the driving force of the United States. So long as we do not screw this up, progress should continue into the future.

Technological advancement and innovative breakthroughs require a host of complimentary activities and institutions to support its growth. Many of these tangible and intangible elements are simply absent in modern-day China.

Arthur Dong is a professor of strategy and economics at Georgetown University’s McDonough School of Business.

The views expressed by contributors are their own and not the views of The Hill.