Reform can prevent Japan-like debt crisis

Despite deepening concerns about China's economy, the country is not heading toward "lost decades" of Japan-style stagnation. And yet a worrisome ambiguity clouds this verdict.

China's non-financial debt has increased from 150 percent of GDP in 2008 to 255 percent today, with two-thirds of the increase concentrated in the corporate sector, largely State-owned enterprises. Since China has the highest savings rate in the world - its gross domestic saving averaging 49 percent of GDP since 2007 - its surging debt hardly comes as a surprise. Economies with high savings are prone to high investment, and the lack of capital market reform in China - exacerbated by the bursting of the equity bubble in 2015 - reinforces the disproportionate role that bank credit has played in funding the country's investment boom.

The Japan comparison is especially instructive in assessing the risks of debt-intensive growth. At nearly 390 percent of GDP in late 2015, Japan's overall debt ratio is about 140 percentage points higher than China's. But because Japan has such a high savings rate - averaging 24 percent of GDP since 2007 - it basically owes its debt to itself. That means it is not vulnerable to the capital flight of foreign investors that often triggers crises.