Does the debt-growth link differ across private and public debt? Evidence from China

Deleveraging has been one of China's announced policy goals since 2015 due to the high debt-to-GDP ratio. Although China's private debt and public debt differ widely in level and usage, the literature overlooks the difference in their impacts on economic growth in China. We fill this research gap by separately investigating the private and public debt-growth link with the Max Share method. Our results show that private debt has inverted U-shaped effects on both investment and TFP, thus growth, which provides new evidence that excessive inflows of capital into real estate and financial assets could crowd out manufacturing investment and hinder innovation. In contrast, public debt still has a positive and linear effect on growth due to the crowding-in effect of public investment on private investment. Finally, this paper suggests focusing more on reducing private debt for China's deleveraging.