What's going on?

The IMF, a major international financial organization, released its first comprehensive report on China�s financial system in over five years � and there was plenty to make global investors sit up and take note.

What does this mean?

The IMF highlighted a few major risks, including rising levels of debt within the Chinese economy. While the pace of borrowing has increased, the rate of China�s economic growth has slowed: essentially suggesting that the drug�s effects are wearing off. Meanwhile, China has built up a complicated financial system whereby consumers in search of returns have turned from formal finance to an unofficial �shadow� banking network. This has led to lots of regular people being exposed to companies that are heavily in debt.

The Chinese government is well aware of the risks � which is partly why it�s recently stepped up measures to try to slow the debt boom.

Why should I care?

For markets: A slowing China is a major risk next year (tweet this).

Whether China can balance the desire to limit debt with maintaining a relatively high rate of economic growth is a big question � for everyone. Next year may well be a tougher slog for economies and companies that do a lot of business with China (from South Korea to Caterpillar) as limits on debt may put a damper on its economic activity.


The bigger picture: Debt, like sand, has got everywhere.

China is not alone in its reliance on debt. Companies in developed economies have borrowed a historically huge amount of money relative to their profits in recent years. Individuals in many countries, including the UK and Canada, are up to their eyeballs in debt (much of which is secured by their homes). There are various ways this could play out, but generally speaking high debt inhibits economic growth (e.g. more money is spent on interest and less on more productive things � especially if interest rates were to go up significantly).