What's Behind Asia's Debt Boom? -- The Short Answer

How much did Asia borrow?

Asian governments, companies and people borrowed the equivalent of 205% of their annual economic output as of 2014. Debt levels are expressed as a ratio to GDP because as economies grow, they can handle more debt. In 2007, before the financial crisis, the debt-to-GDP ratio in Asia was 144%, and that number was 136% in 1996, just before the Asian financial crisis.

Why did Asia borrow so much?

When the global financial crisis hit, Asia’s exports collapsed. To keep their economies humming, Asian countries borrowed, and then kept borrowing, even as the global economy healed. One reason they kept borrowing was because it was easy and cheap. Central banks in the U.S., Japan and Europe were pouring cash into the global economy, and that money drove down borrowing costs.

Who borrowed all that money?

In China, the borrowing was done by huge state-owned companies to build things like rail lines and airports, and also by real-estate developers. Total debt in China rose to 282% of GDP from 158%, and quadrupled in absolute terms from $7.4 trillion to $28.2 trillion. In Japan, the government kept borrowing, pushing the economy’s total debt to 400% of GDP. In countries like South Korea, Australia, Malaysia and Thailand, consumers did the borrowing. Koreans borrowed to buy real estate, pushing its household debt level slightly higher than that in the U.S.

What are the risks?

Borrowing isn’t necessarily bad, especially if it is used for productive investments. But if the money is wasted, it can weigh on economic growth. The higher debt levels have also made it harder for central banks to boost flagging economies with interest rate cuts. If consumers or companies are loaded up on debt, they won’t borrow more, and there’s evidence that’s happening in Asia.

Will there be a crisis?

It’s impossible to say but there are a few factors arguing against a crisis. Few countries borrowed heavily in foreign currencies, so a depreciation won’t be a trigger, as it has been in past crises. An exception is Malaysia, where foreign currency debt is 65% of GDP, among the highest in the world, and declining energy prices have hit the oil exporter’s currency. And U.S. interest rates have stayed low. Fears of a jump, which doesn’t appear to be likely until later this year, had led investors to pull cash out of emerging markets. The biggest risk, economists say, is a period of slower growth as countries pay down debt and work through bad loans.