Chinese dragon balancing coins and houses, representing China's debt.

Decoding China's Debt Dilemma: How Financial Indicators Can Help Stabilize Growth

Jordan Keane in Business & Economy August 2025 • 3 min read.

"A deep dive into how credit, housing, and stock prices impact China's public debt and what it means for future financial stability."

The COVID-19 pandemic sent shockwaves through the global economy, and China was no exception. The resulting financial turmoil exacerbated existing fiscal pressures, leading to a surge in public debt levels. This situation has sparked concerns about the long-term stability and sustainability of China's economic growth.

To navigate these challenges, it's crucial to understand how financial markets influence government finance and public debt. As financial liberalization deepens, these markets become increasingly intertwined with the real economy, impacting fiscal revenue and debt dynamics through factors like taxation, consumer spending, and household wealth.

A recent study employs a sophisticated Markov regime-switching model to analyze China's public debt patterns and the impact of key financial variables, including credit, house prices, and stock prices. By identifying distinct debt regimes and their drivers, the research offers valuable insights for policymakers seeking to manage debt and foster sustainable fiscal policies.

Understanding China's Two Debt Regimes: Surge vs. Steady

Chinese dragon balancing coins and houses, representing China's debt.

The study identifies two distinct regimes governing China's public debt: a "surge" regime characterized by high growth and volatility, and a "steady" regime marked by low growth and low volatility. These regimes reflect different economic conditions and external shocks that impact the country's financial landscape.

During periods of external shocks and crises, China's public debt tends to exhibit high growth rates and increased volatility, placing it firmly within the surge regime. Conversely, during more stable periods, the debt growth rate slows, and volatility diminishes, aligning with the characteristics of the steady regime.

The Surge Regime: High debt growth and high volatility, typically observed during economic crises.
The Steady Regime: Low debt growth and low volatility, characteristic of stable economic periods.

These regime shifts highlight the need for adaptable financial policies that can address the unique challenges posed by each phase. Ignoring these nuances could lead to ineffective debt management and hinder long-term economic sustainability.

Key Takeaways: Financial Variables as Stabilizing Forces

The study's findings reveal that financial variables play a crucial role in shaping China's public debt growth. Specifically, increasing the growth rate of financial variables can help moderate the growth rate of public debt. However, the impact differs between the two regimes.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2407.02183,

Title: How Do Financial Variables Impact Public Debt Growth In China? An Empirical Study Based On Markov Regime-Switching Model

Subject: econ.em

Authors: Tianbao Zhou, Zhixin Liu, Yingying Xu

Published: 02-07-2024

Everything You Need To Know

What are the two main regimes that characterize China's public debt, and how do they differ?

The study identifies two distinct regimes for China's public debt: the "surge" regime and the "steady" regime. The "surge" regime is marked by high debt growth and high volatility, typically observed during economic crises or external shocks. Conversely, the "steady" regime is characterized by low debt growth and low volatility, reflecting more stable economic periods. These regimes underscore the need for financial policies adaptable to changing economic conditions. For example, during the COVID-19 pandemic, China's public debt entered the "surge" regime.

How do financial variables influence China's public debt growth, according to the study?

The study highlights the crucial role of financial variables in shaping China's public debt growth. It indicates that an increasing growth rate of financial variables can help moderate the growth rate of public debt. This underscores the importance of monitoring and managing financial markets to ensure sustainable fiscal policies. The impact of financial variables differs between the "surge" and "steady" regimes. This nuanced understanding is critical for effective debt management strategies.

What external factors can trigger shifts in China's public debt regime, and what are the implications?

External shocks and crises are primary triggers for shifts in China's public debt regime. During such events, China's public debt tends to enter the "surge" regime, marked by high growth and volatility. These shifts imply the need for adaptable financial policies. Ignoring these nuances could lead to ineffective debt management. For instance, the COVID-19 pandemic acted as an external shock, pushing China's public debt into the "surge" regime.

Can you explain the methodology used to analyze China's public debt patterns?

The study utilizes a sophisticated Markov regime-switching model to analyze China's public debt patterns. This model is used to identify distinct debt regimes and their drivers, offering insights for policymakers. The model incorporates key financial variables, including credit, house prices, and stock prices, to understand their impact on debt dynamics. The use of such a model enables a deeper understanding of how financial markets influence government finance and public debt in the context of financial liberalization.

How can understanding the relationship between financial variables and public debt help China achieve sustainable economic growth?

Understanding the relationship between financial variables and public debt is critical for China's sustainable economic growth. The study reveals how factors like credit, house prices, and stock prices influence debt dynamics, which allows policymakers to develop effective debt management strategies. By recognizing the different regimes – "surge" and "steady" – and the triggers for regime shifts, authorities can implement adaptable financial policies. This approach helps to stabilize debt growth, mitigate risks during economic crises, and foster long-term financial stability. Moreover, as financial liberalization deepens, the insights from the study can inform policies related to taxation, consumer spending, and household wealth, creating a more resilient economic foundation.