China's Debt Is Troubling, But It May Not Be As Bad As It Looks

Slowing economic growth in China may be the single biggest reason why the S&P 500 hasn’t made a new all-time high in over a year. Investors around the world are worried about what will happen with China’s staggering $30 trillion of debt if the world’s largest emerging market economy hits the skids.

Internal Debt

According to LPL Financial Chief Economic Strategist John Canally, investors are right to be worried, but things may not be as bad as they seem.

“Most of its debt is owed internally; it controls its own destiny, unlike Greece or Argentina,” Canally explained.

“It also has high levels of foreign currency reserves and domestic savings.”

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The internal nature of China's debt will help minimize the global impact of a debt crisis. Perhaps more importantly, it will allow the Chinese government to unilaterally take any economic measures necessary to prevent such a crisis.

Total Debt Moves

China’s total debt was somewhat stable at around 150 percent of GDP from 2004 to 2008. Since then, it has slowly crept up to near the 250 percent level.

Canally also pointed out the steady rise of Chinese credit default swaps in the past year as a clear indication that investors are beginning to worry about the nation's debt.

So far in 2016, the SPDR S&P 500 ETF Trust SPY is up 1.8 percent, but the iShares FTSE/Xinhua China 25 Index (ETF) FXI is down 8.9 percent.

Disclosure: The author holds no position in the stocks mentioned.