The explosion in Chinese debt, in 4 charts

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Among a multitude of perceived threats that markets continue to grapple with, there is one that stands head and shoulders above the rest: China’s debt levels.

Concerns over the rapid growth in debt following the global financial crisis seem to be growing faster than the actual debt itself, amplified by the idea that a full-blown banking crisis may be about to hit the nation as great swathes of banking assets sour in the period ahead.

Whether that eventuates is the big, ugly unknown.

To make an informed view it’s always good to be presented with information on the subject and that’s just what Gerard Burg, senior Asia economist at the NAB, has delivered in a note to clients today.

Burg supplies these four charts that reveals the rapid build up in Chinese debt levels over the past seven years.

They don’t make for pleasant viewing.

According to the NAB, most of the growth in Chinese debt has come from the shadow banking sector. By its estimates, excluding wealth management products, debt levels in the sector have climbed to around 95% of China’s GDP. That’s about US$10 trillion.

Combining bank loans, shadow banking, government bonds and non-shadow banking aggregate financing, the NAB estimates that China’s total debt stood at 308% of GDP in December 2015.

Most of the debt issued was done by Chinese business, although the NAB notes that much of the debt was issued by Chinese state-owned enterprises (SOEs), blurring the lines between business and government debt levels.

Based off the NAB’s estimates, China’s debt-to-GDP levels are now comparable with many advanced economies, lumping the nation in with illustrious names such as Japan, Ireland, Portugal, Greece and Spain

With debt levels ballooning as economic growth slows, Burg suggests Chinese policy makers now face a significant dilemma regarding the country’s debt.

“They can no longer afford to allow debt to grow unchecked – as this would increase the likelihood of a major financial crisis and the potential for a hard landing,” says Burg. “On the other side, real economic growth is unlikely to be sustainable at the new five year plan target (6.5%) without growth in debt – bringing down the ratio would mean tolerating a considerably lower potential rate for economic growth, something that policy makers are unlikely to tolerate.”

There’s no easy answer as to how to address the problem, ensuring concerns not only remain, but are building.

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