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S&P downgrades Chinese debt as lending surges

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.