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China's debt bubble causing headache for world's financial elite

China's debt

​China's ongoing debt is beginning to have a significant impact on other economies and businesses across the globe, causing something of a financial headache for the world's corporate elite.

The country is believed to be in approximately $28 trillion worth of debt (£21 billion), and according to financial analysts, it is not doing enough to manage this effectively, which is in turn having an adverse impact on the rest of the world.

This makes China one of the worst-performing economies in the world at present, but why is the country in so much debt and exactly what impact is this having on a global scale?

Why is China in so much debt?

A recent survey carried out by Bloomberg News led to the prediction that China's banks were 1.9 trillion yuan (£2 trillion) in debt, but according to new figures from the People's Bank of China, the actual sum is 2.51 trillion yuan. This marks a new record debt statistic for the nation, and indicates that the country's banks are still lending, despite the spiralling debt situation.

What's more, further data from the national bank reveals that aggregate financing has also risen to a record sum in recent months, coming in at 3.42 trillion yuan.

Many believe that one of the best ways for China to recover from its current situation and attempt to get itself out of the red will be to stop, or at least significantly limit, its lending. However, in a country with an estimated population of 1.37 billion people, this is easier said than done.

Yet it is not just Chinese banks that are in trouble, as statistics show that non-financial organisations in China also took on dramatically more debt over the course of 2015, increasing their debt profiles by approximately $1.2 trillion.

But where has all this debt come from in the first place?

As one of the biggest business hotspots in the world, China's corporations want to be the best. The most prevalent lenders to date have been state-owned companies, particularly those within the energy, construction, mining and real estate industries.

Altogether, this has led to the biggest ever increase in corporate debt in Asia, rising from 80 per cent of the region's gross domestic product (GDP) in 2007 to around 125 per cent today.

What's the global impact?

Not only is China's spiralling debt problem causing analysts to worry that the nation is not doing enough to help itself, but it is also having a knock-on impact on business and trade around the world.

In particular, the global crude oil industry is suffering, due to a significant drop in the commodity's value, with Brent crude oil losing half of its value since June last year.

Some are of the view that all of these factors are going to result in a long-term, potentially devastating financial crisis for China, with investor George Soros telling an economic forum in Sri Lanka: "China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets, there is a serious challenge which reminds me of the crisis we had in 2008."

However, in contrast, Capital Economics stated in January: "We continue to believe that growth is more likely to pick up than weaken over coming months."

Only time will tell what the full impact of China's current situation will be on the rest of the world over the coming months, but all eyes are sure to be on the nation to see whether its debt continues to grow or if it recovers in the near future.