Korea vs China — National Debt

The local debt China's official statistics leave out

China's official government debt, central and local combined, runs at about 58.6% of GDP. On that number alone it sits only modestly above Korea's D1 (45.8%) — hardly a dangerous band by international standards. The problem is that this statistic does not represent the substance of Chinese local government finance.

Local government financing vehicles (LGFVs) are legally corporations, but in practice they carry out local government infrastructure investment and hold the resulting debt on their own balance sheets. The debt escapes classification as government borrowing while responsibility for repayment still effectively rests with the local government. On the IMF's augmented debt measure, which folds this in, the ratio rises to roughly 112% of GDP. For one and the same country, two figures — 58.6% and 112% — differ by nearly a factor of two.

Why Korea's D1 looks low

The Korean figure demands the same kind of caution. D1, the headline series, covers only central and local government debt. Widen it to D2 — general government, which brings in non-profit public institutions — and 45.8% becomes 56.5%. More than ten percentage points move on the single question of whether those institutions are counted.

Go further to D3, which adds non-financial public corporations, and the perimeter widens again. Korea has long delivered roads, rail, housing and power through public corporations, so how their debt is treated is especially sensitive in international comparison. This is not entirely unlike China's LGFV debate. Both countries face the same question: how far do you count debt that the government did not directly borrow but would very likely end up answering for?

The borrowed money went to different places

Even at similar ratios, the character of debt turns on where the money went. Most of China's local borrowing flowed into capital spending — roads, rail, industrial parks, property development. That leaves assets behind, but whether those assets generate the cash flow needed to service the debt is a separate question. Underused infrastructure is simultaneously an asset on the books and a maintenance burden.

The rise in Korea's national debt is tied comparatively more to welfare, transfers and counter-cyclical fiscal spending. That spending leaves no asset behind, but it supports household income directly. Neither is inherently superior. Still, when it comes to servicing the debt, China has to ask "will these assets earn a return?" while Korea has to ask "can the revenue base keep carrying this level of spending?" The very shape of the question differs.

How growth has been holding the ratio down

A debt ratio is produced jointly by its numerator, debt, and its denominator, GDP. China's nominal growth was high for a long time, so even as debt rose quickly the ratio climbed relatively gently. The pace at which the denominator expanded partly offset the numerator.

That effect disappears the moment growth slows. With the pace of borrowing unchanged, halving nominal growth makes the ratio climb far more steeply. This is why, in discussions of Chinese debt, the growth forecast is treated as effectively the same question as the debt forecast.

Korea has already entered a low-growth phase, so this cushion is comparatively thin. The same amount of fiscal spending moves the debt ratio more than it would in a high-growth phase. That is why, viewing the two ratios side by side, you have to check the nominal growth assumption behind each.

In short, the two numbers in this table rest on different growth premises. Change the growth rate and the ratio moves without a single additional won or yuan being borrowed.

The order to read this table in

First, before asking which country is higher, check which definition each number uses. Whether Korea is on D1 or D2, and whether China is on the official or the augmented measure, can flip the ranking. Second, read on the premise that both countries carry debt that sits outside government but may end up as the government's responsibility.

Third, look past the ratio to the character of the assets and spending the debt produced. Fourth, remember that the live figures on this site are estimates extrapolated between official releases. If you need an exact point-in-time value, the source tables on each country page will take you to the original publication.