People walk by an electronic board displaying stock trading index at a brokerage house in Beijing. Photo: Andy Wong / AP

S&P downgraded China's debt this week, saying that economy-wide debt increases since 2009 have propped up economic growth but also "diminished financial stability." The decision is a recognition that China's debt — lending that has been funneled to local governments and state-owned enterprise for GDP growth-inducing investment projects of dubious long-run worth — is growing an accelerating rate.

Why it matters: China has at least superficially recovered from its 2015 slump. But some China watchers warn that any attempt to rein in growing debt will have to be accompanied by an acceptance of lower economicgrowth, perhaps as low as 3% annually, compared with today's rate of roughly 7%. Such a slowdown would have profound effects on the economies of the U.S. and Europe.

Michael Pettis, a professor of finance at the Guanghua School of Management at Peking University in Beijing, argues that China must accept a period of economic growth well below the rates it has become accustomed to if it wants to avoid even worse consequences down the road.

  • "This is because there's a big difference between China's sustainable growth rate, based on rising demand driven by household consumption and productive investment and its actual GDP growth rate, which is boosted by massive lending to fund investment projects that are driven by the need to generate economic activity and employment," he writes in a recent Bloomberg editorial.

The second school of thought is that China is developing other ways to boost growth that can replace government spending, and ratings agencies evaluate government debt using what fixed-income analyst Ann Rutledge calls "a static, backward looking mindset which comprehends size but not dynamics or policy objectives."

  • She argues China instituted needed reforms in the wake of the 2015 stock market crash to move the country towards more sustainable growth based on domestic consumer spending.

Go deeper

Updated 1 hour ago - Politics & Policy

Coronavirus dashboard

Illustration: Sarah Grillo/Axios

  1. Global: Total confirmed cases as of 7 p.m. ET: 19,486,171 — Total deaths: 723,599 — Total recoveries — 11,822,887Map.
  2. U.S.: Total confirmed cases as of 7 p.m. ET: 4,989,976 — Total deaths: 162,304 — Total recoveries: 1,643,118 — Total tests: 61,080,587Map.
  3. Politics: Trump signs 4 executive actions on coronavirus aid.
  4. Public health: Fauci says chances are "not great" that COVID-19 vaccine will be 98% effective — 1 in 3 Americans would decline COVID-19 vaccine.
  5. Science: Indoor air is the next coronavirus frontline.
  6. Schools: How back-to-school is playing out in the South as coronavirus rages on — Princeton, Johns Hopkins, Howard to hold fall classes online.

Trump signs 4 executive actions on coronavirus aid

President Trump speaking during a press conference on Aug. 8. Photo: Jim Watson/AFP via Getty Images

President Trump on Saturday signed four executive actions to provide relief from economic damage sustained during the coronavirus pandemic after talks between the White House and Democratic leadership collapsed Friday afternoon.

Why it matters: Because the Constitution gives Congress the power to appropriate federal spending, Trump has limited authority to act unilaterally — and risks a legal challenge if congressional Democrats believe he has overstepped.

7 hours ago - World

What's next for Lebanon after the Beirut explosion

Photo: Houssam Shbaro/Anadolu Agency via Getty Images

Beirut residents are still clearing rubble from streets that appear war-torn, days after a blast that shocked the country and horrified the world.

Why it matters: The explosion is likely to accelerate a painful cycle Lebanon was already living through — discontent, economic distress, and emigration.