China’s debt crisis has reached a point that should never be reached by any modern nation. It currently has a debt worth 225 percent of its GDP, which means that what the country owes is over twice of what it brings in every year. Not dealing with debt is okay for entire nations, to an extent, but these loans have to have extremely long shelf lives. That isn’t the case with China.
It’s different from the UK still owing the U.S. for World War II, for example. These loans are completely different. It has generated fears that China is going to collapse the moment the market enters a depression. But you can learn from the debt crisis.
This guide is going to show you what lessons you can learn.
It just gets worse
China’s debt is large and it keeps getting worse. The problem is that some bad loans from its corporate sector could wipe out 7 percent of its GDP. That’s an enormous increase and it represents what happens when debt is allowed to get out of control.
You have to borrow to pay your debts. The only way to meet your repayments is to continue to borrow. And that’s the situation China finds itself in. You need to make sure that you’re not borrowing to pay your debts. Dealing with debt requires a sensible financial plan.
Don’t allow what you owe to keep getting bigger because you buried your head in the sand.
Exceeding your income can’t last
One of the reasons why China rose to become one of the biggest economies in the world is because it invested heavily. Every year it was posting numbers like a 10 percent increase in the economy. Western countries could only dream of such incredible growth rates.
What people forget is that was because of investment that was funded by borrowing. This is not a problem in itself. You would borrow to get a mortgage, for example, but you have to pay that money back. Getting rid of debt for China means they need to get to a point where their income exceeds what they have to pay back.
Unfortunately, China has yet to reach that point. They need to do what any debtor does and reduce their spending to concentrate on increasing their income. Unfortunately, this is something that the country has yet to do. You should do the exact opposite and either concentrate on reducing your monthly repayments or increasing your income.
Excessive borrowing affects others around you
One of the reasons to get rid of debt as soon as you can is because your repayments impact everyone around you. Never pretend like there isn’t a problem. China is one country that has ruined its relations with other business-oriented countries precisely because of their huge levels of borrowing.
Australia is a nation that has suffered heavily at the hands of China’s crisis. The decline of Chinese business has crippled the Australian mining boom because it stopped many of its orders for iron ore. Until China pays its debts, it will continue to have a negative image.
And the same thing can happen to you and your family. The biggest danger to your dollars, and your future dollars, is you don’t get out of debt. Focus on debt repayment so you can avoid missing out on those magic outings with your family.
There are consequences
Already there’s evidence to show that investors are nervous about China. If the country struggles to pay its debts this isn’t a problem in terms of debt collection. The biggest debt collection mistake people make is they underestimate the consequences. China could make the same mistake as they underestimate how badly investors are going to react if it struggles to pay.
When investors pull out of a country, it can cause a total collapse of the economy around it. Furthermore, international lenders could very well declare China’s prospects to be grim. This could cut off its lines of credit and bring any economic growth to a halt. In the worst case scenario, it could even trigger a depression.
Conclusion – lots to learn
You may not be a country, but you can still learn a lot from countries who’re borrowing more than they can pay back. Learn the lessons of what’s going on in the world and you should be able to avoid problems going forward.
What do you think is the biggest lesson you can learn from China’s debt crisis?
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