What's going on?

Official data suggested that China�s economy grew slightly more than expected in the second quarter � and yet Chinese stocks sold off sharply on Monday!

What does this mean?

China�s economy grew a relatively solid 6.9% versus a year ago (the comparable figure for the US is about 2%). Many economists are skeptical of China�s official GDP figure, but other data released supports the narrative that growth in China picked up last year and has largely continued this year. But there are fears that China�s growth relies too much on companies borrowing money � which leads to more spending, but also increases the risks within an economy (see below).

Why should I care?

The bigger picture: Relying on debt for growth is not sustainable.

People and companies in China are borrowing more money than they ever have, yet economic growth has declined in recent years. In other words, China�s debt-fuelled economic growth is subject to diminishing returns. Therefore, it can�t just keep borrowing more and more money to sustain its growth. Also, heavily indebted companies may not be able to pay back their debt � if this happens on a widespread scale, as is possible in China, economic growth can be severely threatened as lots of large companies face bankruptcy at once.


For markets: The government signaled it is taking action to rein in debt.

Loose rules on lending have helped boost growth in China in previous years, but the Chinese government has recently said it will enact measures to make it more difficult to take out risky loans in China (among other initiatives). At a high-profile financial conference over the weekend, the President of China and other officials emphasized this repeatedly � and fears of tighter lending conditions contributed to a significant drop in Chinese stocks on Monday.