China’s shift from low-income to middle-income status has been the largest and most rapid economic transition in world economic history. Yet, throughout this journey, doubts have been raised about its sustainability. Over the past two years, investors have been singularly focused on the sharp rise in China’s debt to GDP and the possibility of a financial shock.

China’s debt has risen from 147 per cent of GDP in 2007 to 279 per cent of GDP in 2016. Last year, China added 21 percentage points to its debt-to-GDP ratio, or the equivalent of $4.5tn. Effectively China needed almost six renminbi of new debt to grow its nominal GDP by one renminbi.

This debt challenge arose because of policymakers’ approach of targeting higher than potential GDP growth by continuing with excessive levels of investment. With China’s potential growth slowing over the past few years, due to weakening demographics, slowing productivity growth and changing global dynamics, pursuing its growth objective independent of the underlying macro environment has been the key factor causing rising imbalances.