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Xiaohuang Zhu · Song Lin · Lin Wang
Wenqi Wu · Quanli Qin
A Study of
the Turning
Point of
China’s Debt
A Study of the Turning Point of China’s Debt
Xiaohuang Zhu • Song Lin • Lin Wang •
Wenqi Wu • Quanli Qin
A Study of the Turning Point

of China’s Debt
Xiaohuang Zhu Song Lin
CITIC Group Central University of Finance and Economics
Beijing, China Beijing, China
Lin Wang Wenqi Wu

Risk Management Division China Asset Management Company
China Construction Bank Beijing, China
Beijing, China
Quanli Qin
RenMin University of China
Beijing, China
ISBN 978-981-13-1324-0 ISBN 978-981-13-1325-7 (eBook)

https://doi.org/10.1007/978-981-13-1325-7
Library of Congress Control Number: 2018948363
© Springer Nature Singapore Pte Ltd. 2018

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Singapore
Preface
Debt is an organic component of the macroeconomy. A country or region cannot run

smoothly without a reasonable amount of debt; however, excessive debt can signif-
icantly weigh down the macroeconomy. China’s ballooning debt in recent years has
raised concerns at home and abroad. Institutions and scholars hold divided opinions –
with some even predicting that China’s excessive debt could trigger an economic
crisis.
The 2015 Central Economic Work Conference emphasized “de-leveraging” as
one of the government’s five major tasks. The Expert Opinion column of the
People’s Daily in 2016 diagnosed a high leverage ratio as the “original sin” and
the “culprit of high financial risks”; it prescribed “de-leveraging according to the
requirements of supply-side structural reform” as the cure. Meanwhile, the State
Council recently released the Emergency Response Contingency Plan for Local
Government Debt Risks, working to establish a tiered response mechanism for
local debt risks. The plan specified four types of government debt risk events
based on their nature, reach, and damage: grade IV (moderate), grade III (moderately
severe), grade II (severe), and grade I (major). This policy was introduced to call for
market-oriented, law-based measures to defuse government debt risks, to identify the
bottom line in risk prevention, to establish a mechanism for early warning and tiered
responses, to strengthen the accountability for risk events, and to ensure that no
regional or systemic threats arise. It seems safe to say that China stands poised to
tackle its debt dilemma.
Nevertheless, there are still many difficult questions to answer about debt issues
and economic development, such as the following: How should the current size of
China’s debt be measured? Is the current volume of China’s debt within a reasonable
range? What is the debt situation in different social sectors? In what sectors should
China begin de-leveraging? These fundamental questions require profound, clear,
scientific, and quantitative elaboration.
This book explores new methods for measuring China’s total debt. Quantitative
analysis is used to study the relationship between debt volume and economic growth.
This examination suggests that China’s total debt level has surpassed the turning
v
point; this means its influence on GDP has become negative. The book further
probes into the relationship between government debt, debt in the banking sector
and economic growth. The research indicates that for the central government, debt is
still positively related to economic growth; but for local government, debt has
exceeded the turning point and has been a drag on the economy for many years.
Meanwhile, debt in China’s banking sector is now on the verge of exceeding its
notable turning point and may begin to take a toll on GDP growth. In addition to debt
in the macroeconomy, the book also analyzes the leverage in various industries. The
analysis reveals that debt in the chemical fiber manufacturing industry might have
come to its turning point in 2014 when PTA capacity peaked, while debt in the
petrochemical industry might have crossed its turning point in 2011. As for the
industrial chain of the real estate industry, debt within the coal industry reached its
turning point in 2011, with steel industry reaching its turning point the following year
and the nonferrous metals industry and real estate industry reaching their turning
points in 2013. Meanwhile, the debt of the building materials industry has yet to reach
its turning point. Another finding of this research is that the turning point in the
industrial chain of the real estate industry is “contagious” from upstream industries to
downstream – an order opposite to that of the business cycle. The analysis of the real
economy and the virtual economy in this book suggests that since 2009, the ratio
between the two in China has gone beyond a reasonable range, which means that the
virtual economy has ballooned and deviated from the real economy.
This book is aimed at satisfying the actual needs of China’s economic and social
development. Further, it offers quantitative models and research conclusions
concerning debt analysis. The research results can fully serve the supply-side
structural reform and facilitate the adjustment and optimization of the economic
structure.
Beijing, China Xiaohuang Zhu

Song Lin
Lin Wang
Wenqi Wu
Quanli Qin
Contents
1 Debt and Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.1 Theoretical Basis of Debt Studies . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1.1 Classical Economic Growth Models . . . . . . . . . . . . . . . . . 1
1.1.2 The New Institutional Economics and Economic
Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.1.3 The Population Problem in Economic Growth . . . . . . . . . . 4
1.2 Debt and Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 Theoretic Meaning of Turning Point of Debt . . . . . . . . . . . . . . . . 8
1.3.1 Economic Meaning of the Turning Point . . . . . . . . . . . . . . 8
1.3.2 Economic Meaning of the Turning Point of Debt . . . . . . . . 9
1.4 Research Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2 A Study of China’s Total Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.1 The Definition and Characteristics of Total Debt . . . . . . . . . . . . . . 15
2.1.1 Total Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1.2 The Debt of Various Entities . . . . . . . . . . . . . . . . . . . . . . 17
2.1.3 A Trend Analysis of Debt . . . . . . . . . . . . . . . . . . . . . . . . 18
2.2 An International Comparison of Debt Development . . . . . . . . . . . 22
2.2.1 A History of Debt Development in China . . . . . . . . . . . . . 22
2.2.2 A History of Debt Development in Japan . . . . . . . . . . . . . 24
2.2.3 A History of Debt Development in the U.S. . . . . . . . . . . . . 27
2.3 A Metrological Analysis of China’s Debt . . . . . . . . . . . . . . . . . . . 30
2.3.1 An Analysis of the Turning Point of China’s
Overall Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.4 A Metrological Analysis of the Debt of Various
Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.4.1 Corporate Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.4.2 Household Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.4.3 Foreign Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.5 Summary and Suggestions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
vii
viii Contents
3 A Study of China’s Government Debt . . . . . . . . . . . . . . . . . . . . . . . . 43

3.1 Definition and Characteristics of Government Debt . . . . . . . . . . . . 44
3.1.1 Definition of Government Debt . . . . . . . . . . . . . . . . . . . . . 44
3.1.2 A Trend Analysis of the Size of China’s
Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.2 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.2.1 Central Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.2.2 Local Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3.3 A Comparison of Chinese and Foreign Government Debts . . . . . . 50
3.3.1 A History of China’s Government Debt . . . . . . . . . . . . . . . 50
3.3.2 A History of U.S. Government Debt . . . . . . . . . . . . . . . . . 53
3.3.3 A History of Government Debt in Japan . . . . . . . . . . . . . . 55
3.3.4 A History of European Government Debt . . . . . . . . . . . . . 55
3.4 A Metrological Analysis of Government Debt . . . . . . . . . . . . . . . 56
3.4.1 Central Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . 56
3.4.2 Local Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 57
4 A Study of China’s Bank Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
4.1 Definition and Characteristics of Bank Debt . . . . . . . . . . . . . . . . . 66
4.1.1 Definition of Bank Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 66
4.1.2 Characteristics of Bank Debt . . . . . . . . . . . . . . . . . . . . . . 67
4.2 Bank Debt and Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . 73
4.2.1 Bank Debt’s Role in Economic Growth . . . . . . . . . . . . . . . 73
4.2.2 Correlations Between Bank Debt and Economic Growth . . . 74
4.3 A Metrological Analysis of Bank Debt . . . . . . . . . . . . . . . . . . . . . 77
4.3.1 Metrological Model and Analysis Results . . . . . . . . . . . . . 77
4.3.2 Identification of Bank Debt Turning Point . . . . . . . . . . . . . 77
4.3.3 Current Effects and Development Trend of Bank Debt . . . . 78
4.4 Pressure and Challenges Facing the Banking Sector . . . . . . . . . . . 79
4.4.1 External Pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
4.4.2 Problems of Internal Management . . . . . . . . . . . . . . . . . . . 82
5 A Study of China’s Corporate Debt . . . . . . . . . . . . . . . . . . . . . . . . . 91
5.1 Status Quo and Development History of Corporate Debt . . . . . . . . 92
5.1.1 Status Quo of China’s Corporate Debt . . . . . . . . . . . . . . . . 92
5.1.2 A Development History of China’ Corporate Debt . . . . . . . 93
5.2 A Comparison of Debt Leverages of Various Industries . . . . . . . . 95
5.2.1 Debt Size of Various Industries . . . . . . . . . . . . . . . . . . . . 95
5.2.2 Debt Leverages of Various Industries . . . . . . . . . . . . . . . . 98
5.3 Debt Leverages and Profit Margins in Different Industries . . . . . . . 102
5.3.1 Model and Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
5.3.2 Model Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
5.3.3 Changes in the Profitability of Various Industries . . . . . . . . 104
Contents ix
5.4 An Analysis of the Elasticity of Debt Effect in Various Industries . . . 109

5.4.1 Definition of the Elasticity of Debt Effect . . . . . . . . . . . . . 109
5.4.2 An Analysis on Debt Elasticity Coefficient of the Industrial
Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
5.4.3 An Analysis on the Debt Elasticity Coefficient of Other
Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
5.5 Analysis of the Turning Point of the Debt of Important Industries . . . 113
5.5.1 Chemical Fiber Manufacturing Industry . . . . . . . . . . . . . . 113
5.5.2 Petrochemical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
6 A Study of the Debt of Real Estate-Related Industries . . . . . . . . . . . 123
6.1 An Analysis of Debt in the Real Estate Industry . . . . . . . . . . . . . . 124
6.1.1 Status Quo of Debt in the Real Estate Industry . . . . . . . . . . 124
6.1.2 Development Trends of Debt in the Real Estate Industry . . . 128
6.2 Debt in Real Estate-Related Industries . . . . . . . . . . . . . . . . . . . . . 130
6.2.1 Debt in the Coal Industry . . . . . . . . . . . . . . . . . . . . . . . . . 131
6.2.2 Debt in the Iron and Steel Industry . . . . . . . . . . . . . . . . . . 134
6.2.3 Debt of the Cement Industry . . . . . . . . . . . . . . . . . . . . . . . 136
6.2.4 Nonferrous Metal Industry . . . . . . . . . . . . . . . . . . . . . . . . 138
6.2.5 Furniture Manufacturing and Household Appliance
Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
6.3 An Econometric Analysis of the Debt of Industries Along the Real
Estate Industrial Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
6.3.1 Econometric Model Design . . . . . . . . . . . . . . . . . . . . . . . 144
6.3.2 Calculations of the Turning Point of Debt for Different
Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
6.3.3 Summary of the Econometric Analysis . . . . . . . . . . . . . . . 152
6.4 Analysis on the Transmission of Turning Point of Debt Along the
Real Estate Industrial Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
6.4.1 The Debt Size of Major Industries Along the Real Estate
Industrial Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
6.4.2 The Transmission Effect of the Turning Point of Debt in the
Industries Along the Real Estate Industrial Chain . . . . . . . . 156
7 A Study of the Real Economy and the Virtual Economy . . . . . . . . . . 165
7.1 The State of the Real Economy and Virtual Economy . . . . . . . . . . 166
7.1.1 The Definition of the Real Economy and the Virtual
Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
7.1.2 The State of the Real Economy and the Virtual Economy . . . 167
7.2 The Golden Ratio of the Real Economy and the Virtual Economy . . . 169
7.2.1 Calculating Total Factor Productivity . . . . . . . . . . . . . . . . 169
7.2.2 Trend of Total Factor Productivity . . . . . . . . . . . . . . . . . . 172
x Contents
7.3 The Granger Causality Test of the Real Economy and the Virtual
Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
7.3.1 Filter Analysis of the Real Economy and the Virtual
Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
7.3.2 Co-integration Analysis of Long-Term Trends and
Short-Term Fluctuations . . . . . . . . . . . . . . . . . . . . . . . . . . 177
7.3.3 The Results of the Granger Causality Test of Long-Term
Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
7.3.4 The Results of the Granger Causality Test of Short-Term
Fluctuations in the Virtual Economy and the Real Economy . . . 180
8 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
8.1 Research Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
8.2 Research Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
8.3 Policy Suggestions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
Postscript . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
About the Author
About the lead author
Professor Xiaohuang Zhu was born on July 2, 1956, in Cili County, Hunan Province.
He obtained his doctorate in international economy from Lingnan College of Sun
Yat-sen University in 2006.
Zhu previously worked in China Construction Bank as the executive director and
then as deputy president/chief risk officer. In August 2012, he was appointed as the
deputy general manager of CITIC Ltd. and president of CITIC Bank. In May 2014,
Zhu became chairman of the supervisory board of the CITIC Group Corporation. He
is a part-time professor at Renmin University of China, Wuhan University, Shenzhen
University, and Hunan University. As a senior economist, Zhu is entitled to the State
Council Special Allowance. He also serves as the vice chairman of China Behavior
Law Association and chairman of its Branching Financial and Legal Behavior
Research Society. Professor Zhu has published a variety of monographs and collec-
tions of works including The New Study of Economic Law, Random Collections of
Past Days, Lingnan Notes, Risk Management of Commercial Banks, Be Away from
Iceberg, Weaving Net While Standing at Riverside, Value Banks, and Faith in
Wealth.
xi
Chapter 1
Debt and Economic Growth
It is a universal rule that quantitative accumulation will ultimately lead to qualitative

transformation and, during this process, there is an turning point where the former
ends and the latter starts. The point can demonstrate how things’ natures change at
the junction between two phases. In view of mankind’s current cognitive capabili-
ties, such a turning point can be deduced from adequate data through mathematic,
metrological and modelling methods, based on which we can assess theories
concerning the past and the future. This is a modern technique applicable to all
scientific studies, including those of the social sciences. Present day economic
studies can pinpoint the turning points of many economic phenomena in their
evolutionary processes, providing some guidance on policies and strategies.
1.1 Theoretical Basis of Debt Studies
1.1.1 Classical Economic Growth Models
Debt studies are essentially aimed at exploring the relationship between debt and
economic growth. In economic theories, that is the focus of economic growth
theories and models.
In general terms, economic growth theories concentrate on the economic aggre-
gates in a specific region or country and, using the methodology of equilibrium
analysis, establish a particular economic model and discuss the conditions required
for a stable equilibrium among various factors in the long-term development process.
Under this condition, the economic aggregates of a region or country will grow with
certain characteristics. According to economic growth theories, the ‘economic
aggregates’ of a region or country usually refers to the sum of all goods and services
produced in a given period by that region or country as an individual economy. In
some cases, economic growth theories also look at real output per capita, calculated
using the total population of a region or country.
© Springer Nature Singapore Pte Ltd. 2018 1

X. Zhu et al., A Study of the Turning Point of China’s Debt,
https://doi.org/10.1007/978-981-13-1325-7_1
2 1 Debt and Economic Growth
Sources of economic growth, namely those factors that might impact economic
growth, are at the heart of economic growth theories. In macroeconomic theories,
scholars often study the impact of various factors on economic growth and the
equilibrium among factors using the production function. The Harrod–Domar
model, proposed in the 1930s, is the earliest model of economic growth.
The Harrod–Domar model is based on Keynesian economics and assumes that
there is only one type of product in a society, which is not only a capital good, but
also a consumer good; at the same time, there is only one sector and one production
technology. To produce the aforementioned goods, this model also assumes that
only two production factors exist: labour and capital. The two factors are used in a
fixed proportion to produce goods and cannot be substituted for one another.
Additionally, the model introduces the factors of time and capital, thus making
Keynesian theories dynamic in the long run.
At its core, the Harrod–Domar model seeks to explain the conditions for steady
economic growth, causes of economic fluctuations and how the economy can be
regulated to achieve long-term balanced growth. According to its assumptions, to
achieve the steady growth of a society’s economy, the expected investment
demand of investors must be equal to the supply of savings in the same period:
in this way, savings can be translated into investments so as to achieve equality
between the two and, thus, to promote steady economic growth. Subject to many
restrictions, this model assumes that there are constant returns to scale and does not
allow for a society’s technological progress. Hence, it became the target of fierce
criticism from neoclassical economists who proposed the Solow growth model to
replace it in the 1950s.
The Solow growth model is also called ‘the neoclassical growth model’ and ‘the
exogenous growth model’. This model uses Cobb–Douglas’ production function to
describe the production process of a whole society. It, like the Harrod–Domar
model, assumes that a society’s savings can all be translated into investments.
Nevertheless, it holds that investment and capital, as two factors of production, can
be substituted for each other and that the marginal return of investment is
diminishing; additionally, it identifies the significance of technology in the pro-
duction function.
As the results of the Solow growth model indicate, capital is not the only major
determinant of the long-term growth rate of economic aggregates; the increase of
labour and technological progress also play a critical role in economic growth. In
view of the labour factor, in addition to an increase of workforce, its overall quality –
especially its increasing technology-related capabilities – is conducive to economic
development. Yet, the Solow growth model has a clear limit, for it ignores the
investment function. In reality, capital and labour cannot be completely substituted
for each other. The model can thus ignore the important role played by entrepreneurs
in integrating these two factors.
1.1 Theoretical Basis of Debt Studies 3
1.1.2 The New Institutional Economics and Economic

Growth
In contrast to the Solow growth model, the new institutional economics holds that,
apart from capital, labour and technology, the institutional environment of a country
is also a key factor in promoting economic growth. First, institutions can determine
transaction costs in the market and thus determine the capability of a producer to
obtain investment, a labour force and technology. In this way, they can have an
impact on the rate of economic growth. Second, institutions also determine the
incentive structures of organizations and workforces, and thus impact the potential
technological innovations of economic organizations, thereby either promoting or
hindering economic growth.
First, the new institutional economics argues that lower transaction costs can be
the fundamental guarantee ensuring that the market functions well. With relatively
low transaction costs, both parties to a transaction can have a clearer understanding
of market supply and demand, and transactions can be settled in a more explicit and
smoother manner. When coordinating capital, labour and technology for economic
activities, producers are able to achieve an economic output at a lower cost.
Meanwhile, a highly specialized system and detailed division of labour can develop
across the economy, which will improve the economy’s output efficiency. In the new
institutional economics, transaction costs are determined by various factors, includ-
ing institutional frameworks, policy and legal systems, and the social and cultural
environment of a country. Governments play a critical role in the institutional
environment, as most institutions are made and implemented by them. Hence,
governments must be able to create an institutional framework that can proactively
and effectively decrease transaction costs and make transaction rules more
formalized and transparent.
Second, progress in technology, the most important factor in the Solow growth
model, is closely tied to the institutional environment. In general, technological
development is prompted by three factors. The first factor is the creativity of human
beings. Humans essentially make technological progress possible. Technological
research and development and innovations can involve a long and costly process.
Hence, if a society does not have a sound institutional environment that can
encourage people to undertake research activities, it will be difficult for organiza-
tions and individuals to be actively engaged in technological development. The
second factor is a well-functioning capital market. Technological innovations
require a constant inflow of capital, and funds from individuals or organizations
can hardly satisfy their financial needs for long-term development. In that scenario,
an effective capital market can draw funds from different sources so as to provide
financial support for promising technological innovations. Third, effective market
competition is also important for technological development. It can serve as an
essential approach for evaluating the market value of technologies developed by
individuals and organizations, and only those surviving market competition can
boast of a promising future. Therefore, it can be concluded that the three factors
above are all closely related to the institutional environment of a country. A sound
institutional framework can sufficiently encourage technological progress and inno-
vation, thereby nourishing economic growth.
1.1.3 The Population Problem in Economic Growth
The importance of increases in workforce, emphasized in the Solow growth model,

has been challenged by the macroeconomic activities of various countries, primarily
due to the weakening demographic dividend.
The demographic dividend is evaluated based on the distribution of a country’s
labour force. If the working-age population is a large share of the total in a country, a
decent number of workers are available for production in that society, and people
will not need to pay high child-care and pension costs. This will facilitate economic
activities and growth. The demographic dividend can also provide strong support for
the role of labour in the Solow growth model. In existing studies, scholars in China
and abroad have established various models with different measures, and their
results all indicate that the demographic dividend can significantly impact economic
growth. The research on China’s economic activities has in particular demonstrated
the importance of the demographic dividend. However, due to differences in indi-
cators and measures, the impact of the demographic dividend on economic growth
may vary to some extent. According to existing studies, the huge growth in the size
of a workforce, driven by the demographic dividend, can impact economic growth in
three ways. First, the increasing supply of labour can help to achieve economies of
scale, thus improving overall output in the economy. Second, it can also promote an
increase in the savings ratio and investment rate, thereby accelerating economic
growth. Third, as the life expectancy of the workforce increases, people’s percep-
tions of human capital investment change, which then creates more opportunities for
using technological inventions, improving the quality of labour and boosting eco-
nomic growth. Overall, therefore, existing studies have acknowledged that the
demographic dividend has been an important driver of rapid economic development
in China and East Asia in recent years.
However, in view of the reality in China, the positive impact of the demographic
dividend is constantly diminishing. Both economic growth and population theories
show that the demographic dividend in a country is not a sustainable factor for that
country’s development. The overall aging of the workforce also means the end of the
demographic dividend. China has implemented a family planning policy since the
1980s, leading to a constant decrease in the birth rate. Although the two-child policy
has been in effect in recent years, a change in the birth rate is still a long way off. At
present, the aging trend in China is accelerating. Hence, in the long run, the
workforce may account for a smaller share of the total, and the demographic
dividend assisting China’s economic growth will be constantly weakened. The
labour-driven growth model will therefore be significantly transformed.
1.2 Debt and Economic Growth 5
1.2 Debt and Economic Growth
Debt plays an important role in economic growth, which has been especially evident
since 1980s, when debt-driven economic growth took hold in many Western coun-
tries and the United States in particular through financialization, during which time
economic growth was accompanied by a rising fiscal deficit, corporate debt, con-
sumer credit and international trade deficit.
The fundamental feature of debt-driven growth is that it allows major social
sectors to invest and consume first and to accumulate and profit later through
borrowing money. During this process, debt serves as advanced capital supporting
the operation of social sectors, after which lenders repay their debt, creating a
virtuous cycle of economic activities. A debt-driven economy, in which the cost of
borrowing money is reduced, provides social sectors with easier access to capital,
facilitating social investment and consumption. When coming from other sectors,
such advanced capital means that those sectors idle resources are full utilized; when
drawn from future income, it indicates the continuity of social sectors’ accumulation
and reproduction processes.
Despite its merits, a debt-driven economy risks bringing dire consequences once
the economy becomes over-dependent on debt and the debt build-up exceeds a
normal range. The greatly reduced cost of investment and financing in a debt-
driven economy encourages investment efforts across social sectors, including
some sunset sectors with bleak prospects, resulting in overheated investment or
even financial bubbles. For example, in theory, central and local governments can
boost domestic demand and thus economic growth through infrastructure investment
while keeping debt in a reasonable range through macro-control. Yet, academically
and practically speaking, it is not ‘the more the merrier’ with central and local
government debt, which begs the question of what the parameters of debt manage-
ment should be: where should the boundaries on debt be set to maximize its
productive force while keeping its counter-productive force in check?
Continuous debt expansion may prompt financial institutions, an important
capital intermediary in the social economy, to venture into risky speculation, making
the already fragile debt chain even more so. Once the debt chain fractures, a financial
crisis becomes unavoidable. This is exactly what happened in 2008 with the ‘sub-
prime crisis’ in the United States.
Thus far, the text has provided a general account of the relationship between debt
and economic growth. The following will break down the impact of debt on
economic growth from the perspective of different debtors.
1. Central government debt
This section mainly focuses on treasury bonds issued by central governments,
which are an important source of state income. By issuing treasure bonds, the central
government can pool together superfluous savings on the credit market and reinvest
it to improve infrastructure, the social security system and people’s livelihoods, thus
meeting the demands of economic growth.
Compared with other fiscal instruments, treasury bonds have advantages, espe-
cially in times of economic recession. During a recession, the actual national income
is lower than the potential national income and the government’s budget deficit is
very high. If the government choses to increase state revenue and reduce the deficit
through higher tax rates, people will have less money in their pockets and bank
accounts; hence, there will be less social capital for investment, which will ulti-
mately aggravate the economic recession. However, if the government chose to turn
public savings into investment by issuing treasury bonds, it can close the gap in the
fiscal deficit while spurring economic growth.
Despite treasury bonds’ merits, the amount issued should also be kept within a
reasonable range. Excessive treasure bonds, on one hand, can negatively influence
the long-term actual interest rate and social investment and, on the other hand,
worsen fiscal imbalances or trigger a bank or currency crisis. Increasing debt and
issuing currency as a way of repaying government debt are equally detrimental to the
economy.
2. Local government debt
Local government debt is good for economic growth in two ways: Pooling
together the capital necessary for local economic regulation is an important tool of
macro-control for regional governments. This is especially true in places where the
local government is financially inadequate and local financial institutions are not
mature enough. Second, issuing debt enables regional governments to provide better
public products and services, as money raised through issuing debt is usually spent
on local infrastructure construction and public product production, thus boosting
local development and improving living conditions.
But, like central government debt, local government debt also has its limits,
which are determined by government revenue. A local government that issues
more debt than it can repay will put itself under huge pressure, struggling to meet
deadlines through strenuous efforts and finally getting stuck in a vicious circle of
debt. Once a government fails to cough up enough of a payment on the due day, its
expenditure will soon be compromised, preventing it from operating on-going pro-
jects and even from performing necessary functions. Furthermore, a debt crisis at the
local level will eventually put more pressure on the central government, which
usually foots the bill for local governments.
3. Corporate debt
Companies, as a major part of the modern economy and society, create value and
satisfy market demand. Corporate debt, which mainly supports corporate operations
and management, can be divided into three categories: long-term debt that serves
long-term capital needs, short-term debt that makes up for temporary capital short-
ages and payables arising from daily operations. A company’s long-term debt
mainly supports its production and investment activities under its long-term strategy,
including equipment purchasing, technology introduction, new product develop-
ment and mergers and acquisitions. Short-term debt is a makeshift solution allowing
companies to bridge over a temporary lack of funds, such as to smooth hitches in
1.2 Debt and Economic Growth 7
capital turnover or to cover an impromptu purchase. Operating payables are closely

linked with a company’s daily operations, such as regular purchases, stock manage-
ment and salary payments. Debt is a basic financing instrument for companies, and a
reasonable amount of debt is necessary for the development of both companies and
the national economy.
With that being said, companies cannot afford to build their debt load too high. If
companies borrow money faster than they can earn it, their debt will pile up,
consuming corporate capital that could otherwise be spent on research and develop-
ment and mergers and acquisitions, thus undermining their innovation, transforma-
tion and upgrading efforts. And, when such a case is prevalent throughout an
industry, the entire industry’s ability to innovate and upgrade will stagnate. Besides,
high corporate debt, mostly banks loans, will increase banks’ financial risks and
reduce the efficiency of regional resource allocation.
4. Debt in the financial sector
This section focuses on the banking sector. As the financial intermediary for the
entire society and economy, banks usually have abundant capital, good credit and
many financial products, making their sound operations crucial to the stability of
both the financial system and the national economy as a whole. Therefore, debt in the
banking sector has an important influence on economic growth.
Debt service constitutes the cornerstone of the banking sector, which is the credit
intermediary of the entire society. The size and stability of a bank’s debt determines
the size and stability of its assets and intermediate business. Therefore, commercial
banks usually make debt structure the priority of risk management. A reasonable
debt structure can facilitate assets and intermediate business, providing great poten-
tial for a banks’ overall development. Excessive debt, an unreasonable debt structure
or an unbalanced ratio between long-term and short-term debt will hinder assets and
intermediate business having less mobility, thus putting a brake on the development
of commercial banks or even jeopardizing the stability of the national economy and
society.
5. Household debt
Household debt is defined as the amount of money that all adults in a household
owe financial institutions, which is an important factor in household consumption.
As the current capital market in China is not mature enough to offer the public
adequate financial products for investment and consumption, debt is an important
choice for people to conduct inter-temporal consumption and improve their
livelihoods.
Household debt has clear microscopic consequences. Within their range of
repaying ability, individuals can complement their income with some debt to
purchase expensive products and improve their life quality; yet, too much debt
will put mounting pressure on families’ living standards. Household debt has clear
macroscopic consequences too. Rapid growth of household debt will encourage
irrational consumption among middle- and even low-income families, disturbing
normal consumption structures and industry development. Too much household
debt also implies higher risks for the financial system. Higher debt often comes with
a higher default rate, leaving commercial banks to take the brunt of bad loans.
Therefore, household debt has a significant influence on social stability, financial
security and the entire macroeconomy.
6. Foreign debt
Foreign debt is money borrowed by a country from foreign citizens, companies or
governments. With deepening globalization and increasing capital account mobility,
reasonably increasing foreign debt is conducive to economic development, espe-
cially for developing countries with low foreign debt, in the following ways: first,
foreign debt can serve as a substitute for domestic debt, reducing the effect on
domestic interest rates and the cost of financing, thus avoiding the potential negative
impact on economic growth caused by massive debt; second, medium- and long-
term foreign debt is usually invested in infrastructure construction, which facilitates
economic development. Moreover, foreign debt often has spillover effects for
technology and innovation, boosting research and development and organizational
and institutional innovation, as well as employment and occupational training.
Yet, excessive foreign debt or unbalanced foreign debt structure, like too much
commercial debt or medium- to long-term debt, will heighten risks and stem
economic growth.
1.3 Theoretic Meaning of Turning Point of Debt
1.3.1 Economic Meaning of the Turning Point
‘Turning point’ has different definitions in mathematics and economics. In mathe-

matics, turning point means a point on a curve where the curve changes from being
concave (concave downward) to convex (concave upward), or vice versa; while in
economics, turning point refers to changes in a trend or situation (a turning point)
instead of a change of sign in second derivative (from being above 0 to below 0 or
vice versa).
Two of the more important turning points in economics are the Lewis turning
point and the turning point of the Kuznets curve. The Lewis turning point often
occurs in developing countries having a dual economic structure, where rural
labour lives on subsistence wages due to a labour surplus and low agricultural
productivity. And, since the industrial sector pays higher salaries than does the
agricultural industry, it is able to attract a continuous flow of rural labour without
having to raise salaries too much. At this stage, the curve of labour supply and
demand is flat. Later, massive migration of rural labour will force agricultural
productivity to improve and result in a labour shortage in rural areas, eventually
driving up rural salaries. Therefore, the Lewis turning point refers to the point
when surplus labour changes from being infinite to being limited and salaries start
to rise from a stationary level.
1.3 Theoretic Meaning of Turning Point of Debt 9
Fig. 1.1 Kuznets curve

Income
Gap
Income Per Capita
The Kuznets curve describes the relationship between economic growth and
income distribution, as well as the environmental problems of a country with an
inverted U-shaped curve. With income distribution, as an economy grows, income
inequality first increases to a high point before it declines, suggesting that when an
economy grows to a fairly high level, its focus will shift from efficiency to equality.
The same rule applies to environmental pollution, which rises as an economy grows
to a high point before descending. The high point in both cases is what we call the
turning point of the Kuznets curve. Thus, the Kuznets curve for the environment
represents the inverted U-shaped changes of environmental degradation (Fig. 1.1).
1.3.2 Economic Meaning of the Turning Point of Debt
In economics, the relationship between debt, one factor of production and economic
growth follows the law of diminishing marginal utility.
1. Short-term effect of debt
The relationship between the short term input and output of debt follows the law
of diminishing returns, which is also called the law of diminishing marginal pro-
ductivity, meaning that in the production process, as we increase the input of a
production factor while keeping the input of other factors unchanged, there is a
decline in the marginal utility derived from each additional unit of that factor after it
reaches a certain level.
The law of diminishing marginal utility is based on the condition that technology
and the input of other production factors are kept constant. In terms of a specific
industry or economy, when debt becomes part of its production funding, there will
be a decline in the marginal utility derived from each additional unit of debt
resources. In other words, although output will at first grow, with the second
derivative of the equation being negative, the growth rate will start to slow down,
finally reaching the limit and taking a downturn, and this is when the marginal utility
of debt starts to decline (Fig. 1.2).
Fig. 1.2 Short-term effect

of debt
2. Long-term effect of debt

In view of the long-term effect of production, debt as a factor of production will
impact output in the way suggested by the law of decreasing returns to scale as long
as the other conditions are kept constant. In economics, ‘decreasing returns to scale’
means the situation where output increases by less than the proportional change in
factors of production. Western economists suggest that the change in enterprises’
returns to scale might follow a pattern: When a small start-up enterprise begins to
grow fast, it enters a period of increasing returns to scale; driven by profits, it may
continue expanding its production after benefiting from a larger scale of production,
and its returns will remain scale invariant at this stage. However, if it aggressively
over-pursues market dominance and market share and thus keeps expanding its
production, it is likely to enter a period of decreasing returns to scale.
Similarly, for an industry or a country, if the economy begins to take off after the
initial stage, it will enter a period of increasing returns to scale; driven by profits and
economic benefits, the economy may further increase the input of debt after realizing
that this can promote economic growth and scale expansion, and its overall returns
will be scale invariant. However, if it keeps over-pursuing economies of scale and
continues increasing debt, it may enter a period of decreasing returns to scale
(Fig. 1.3).
The law of diminishing returns (i.e. the law of diminishing marginal utility) states
that, within a relatively short period, as a certain factor of production is increased
while other factors are kept constant, there will be a decline in the number of
products derived from each factor of production. The law can be expressed with
the formula Y ¼ f(L), in which f00 < 0.
In the case of decreasing returns to scale, the overall output increases by less than
the proportional change in the factors of production. In simple terms, it can be
expressed with the Cobb–Douglas production function: Y ¼ AKâL^b. When
a + b < 1, the function is exhibiting decreasing returns to scale.
1.4 Research Framework 11
Fig. 1.3 Long-term effect

of debt Economic G∗
Growth
Debt Scale
If the output in an economy increases by less than the proportional change in

factors of production (e.g. capital), when production is expanded, the situation can
be referred to as ‘diseconomies of scale’. During the process of economic develop-
ment, all economies will pursue economies of scale and avoid diseconomies of scale.
Hence, it is necessary to figure out how much capital investment (e.g. debt) can
achieve the best economic benefits, explore the relations and matches among various
economic scales, reveal the trend of the economic scale and structure and seek to
design major principles and countermeasures for an optimal structure.
Therefore, the short-term and long-term effects of debt show that a threshold
exists for the size of debt in the economy of a region or country. When the overall
debt remains below the threshold, it can positively impact economic growth in both
the short and long run. However, when the overall debt exceeds the threshold, the
debt will exert negative impacts on economic growth. The threshold for the size of
debt (i.e. the turning point of debt) is the focus of this study.
1.4 Research Framework
This study aims to identify the optimum debt scale for China as a whole, and with
this ideological and methodological guidance, to explore the optimal boundary for
deleveraging and reducing debt. Based on the laws of market economy development,
in combination with the characteristics of China’s economic development and with
reference to the theoretical framework of the ‘threshold theory’, the authors analyse
and summarize the general and regular characteristics of the development of China’s
economy and all types of debt. Furthermore, by constructing a scientific and
reasonable statistical regression model, the authors attempt to identify the turning
point of debt in terms of its influence on economic growth. The main contents of this
book are as follows.
• A Study of China’s Debt

The study of China’s debt is the most important part of the book. In this section,
the methods for defining and measuring China’s debt, as well as the laws of debt
growth during the past decade, are determined. On this basis, the authors develop an
econometric model of debt and economic growth and calculate the debt turning point
through quantitative analysis. The results of the study demonstrate the general
features of China’s debt, and general management suggestions are provided
accordingly.
• A Study of China’s Government Debt
With their special functions, governments play an important role in economic
restructuring and development; therefore, government debt is also a highlight of
economic study and analysis. With clear knowledge of China’s debt on the whole, it
becomes necessary to analyse the characteristics of government debt with quantita-
tive methods and to explore whether a similar turning point exists. In recent years,
the size of government debt has expanded rapidly, which makes this study all the
more relevant.
• A Study of China’s Bank Debt
The banking industry constitutes an important part of the financial industry;
thus, it is also a pillar industry supporting the operation and growth China’s
macroeconomy. The authors focus on the banking industry, probing the debt
development trend of China’s financial industry, which has banks at its core. In
light of similar research ideologies, a quantitative model of banks’ debt size and
economic growth is constructed, on the basis of which the authors attempt to
identify the possible turning point. In addition the internal and external challenges
confronting China’s traditional financial service model with banks at its core are
described in this book and relevant suggestions on its transformation are provided.
• A Study of the Appropriate Proportion of the Virtual and Real Economy
The serious imbalance between the virtual and real economy is an unavoidable
problem that must be tackled in the operation of China’s macroeconomy. Debt
constitutes an important part of the virtual economy. This chapter first calculates
China’s total factor productivity and analyses its development trend and changing
features. Then, it studies the proportion of China’s virtual and real economy from the
perspective of their contributions to improving total factor productivity, and it
proposes an appropriate proportion that complies with market laws and can maintain
sustainable and stable economic development.
• A Study of Different Industries’ Debt Leverages
The debt sizes of different industries are also a research focus of this book. The
authors conduct a descriptive analysis of the debt of several key industries, as well as a
quantitative analysis of boundary effects of industry debt scale growth on economic
1.4 Research Framework 13
growth (or industrial added value) to obtain the debt turning points of different
industries and provide references for debt leverage analysis and decision-making.
• A Study of the Debt Leverage of the Real Estate Industry
Real estate is very important to China’s economy and its people’s livelihoods.
Therefore, after analysing the debt leverages of several industries, the authors focus
on the real estate industry and propose an econometric model for calculating the debt
turning points of key real estate–related industries and the space for deleveraging.
With a quantitative methodology, the authors compare important factors such as as
the time when turning points will be reached and the space left for deleveraging. The
conclusions of this chapter are targeted.
As mentioned earlier, based on the relationship between debt and economic
growth, the economic meaning of turning points and the pressures that debt places
on China’s economy and people’s lives, the authors hope to identify an appropriate
range of debt sizes, in other words, to define the turning points in objective terms.
Among all kinds of economic growth elements, such as capital, labour, technol-
ogy and growth mechanisms, this research focuses on debt, the only important
economic factor in capital. As an impetus for economic growth, debt is actually a
double-edged sword. The turning points of debt are critical to a market economy.
Through an analysis of debt scale changes, the authors try to reveal the laws of
economic growth. This is especially significant for developing countries that are
relatively short of capital.
Chapter 2
A Study of China’s Total Debt
Debt is a natural component of the macroeconomy, but its sound development

cannot be achieved without proper debt leverage. In fact, the macroeconomy may
be jeopardized when the total debt volume becomes too large. The current total debt
of China is nearly twice its GDP, and non-governmental debt accounts for more than
80% of the total. Furthermore, during the last 5 years, the dependence of China’s
economic growth on debt has nearly doubled. All these factors imply that it’s critical
and urgent to study the size and scale of China’s debt.
Previous studies have mainly concentrated on debt issues through analyzing the
general operations of the macroeconomy, while those focusing on the quantitative
relationship between debt and economic growth have been rare. In addition, many
studies have focused only on the central government debt or local government debt,
but have failed to assess the total debt volume and analyze the influences of debt on
economic development. Using the available data, we specify the measurements for
China’s total debt and the debt of various entities within China, and we elaborate on
their current situation and distribution characteristics. The curvilinear relationship
between the total debt volume and economic growth is illustrated with a linear
regression model.
The results of the data analysis in this book appear to prove the existence of
the turning point of China’s total debt: the increase of total debt directly boosts the
growth of GDP; however, as the total debt amounts to RMB 96.98 trillion
(in 2003 prices) or RMB 134.12 trillion (in 2015 prices), the GDP is predicted
to decline. Data shows that the current total debt of China has already exceeded
the turning point, which means that debt is now adversely influencing GDP.
Therefore, it is urgent to promptly curb the total debt, improve economic structure
and thus enhance the sound development of the economy.
© Springer Nature Singapore Pte Ltd. 2018 15

X. Zhu et al., A Study of the Turning Point of China’s Debt,
https://doi.org/10.1007/978-981-13-1325-7_2
16 2 A Study of China’s Total Debt
2.1 The Definition and Characteristics of Total Debt
2.1.1 Total Debt
At present, it is difficult to obtain data about debt in China, and there is no first-hand
data on total debt. Hence we attempted to measure the total debt in China from two
alternative perspectives: the use of capital (debt 1) and the provision of capital (debt
2).
The use of capital perspective divides society into two parts: debt providers
(mainly lending institutions such as banks and trusts) and debt users (a major
measurement of debt). There is a mirror image relationship between debt providers
and users, as the users’ liabilities are the providers’ claims. So from this perspective,
we can determine the overall levels of financing based on total social financing
(TSF). Debt financing – provided by financial institutions for non-financial institu-
tions – is TSF minus direct financing, i.e. equity. However, this measurement fails to
consider all elements and underestimates financing from other sources, such as
non-governmental financing and peer-to-peer (P2P) financing. Nor does it include
national liability (national debt and local government debt). Therefore, debt 1 can be
calculated as:
Total debt 1 ¼ TSF domestic stocks of non-financial enterprises
þ national debt þ local government debt
The provision of capital perspective focuses on the aggregate debt of all debtors
in an economy. Usually, organizations or individuals that raise financing by assum-
ing debts include government agencies, enterprises and households. Government
agencies can be subdivided into the central government and local governments.
Enterprises can be classified into various industries: for example, a separate study
can be conducted on financial institutions or auto businesses. Therefore, debt 2 can
be calculated as:
Total debt 2 ¼ government debt þ corporate debt þ bank debt
þ household debt þ foreign debt
As we can see, the first perspective defines total debt based on the function and
role of capital in an economy. It demonstrates that debt serves as a foundation of the
society. There have been sufficient, publicly available data concerning TSF, domes-
tic stocks of non-financial enterprises, treasury bonds and local government debt,
which makes debt research easier. Yet due to the complexity of the economy, this
method can hardly cover all financing sources in the society, thus underestimating
total debt.
The second perspective analyzes possible debt sources by defining various
debtors in the society. It can explicitly present the debt volumes assumed by different
debtors and provide information for the analysis of total debt structure. However, it
draws on debtor data from diverse sources, making it difficult to distinguish between
2.1 The Definition and Characteristics of Total Debt 17
them. Moreover, the debts of different debtors may overlap: for example, the debts
of financial institutions are, in a way, assets of non-financial enterprises and gov-
ernment agencies. Hence the perspective may overestimate the total debt. Mean-
while, since it is difficult to access data concerning government debt, and the debt
data of various debtors differs in periods of availability, total debt 2 covers only a
relatively short period of time, hence hampering empirical research.
There is a chance that the first perspective could underestimate total debt.
Nevertheless, in view of the accessibility of data and the sustainability of follow-
up research, in this book, total debt 1 is used as the principal measurement of China’s
total debt.
2.1.2 The Debt of Various Entities
This research included various types of debts such as those incurred by the govern-
ment (including central and local government debt), corporations, households and
foreigners. These are all effective components of the macroeconomy.
Central Government Debt The data were derived from statistical yearbooks
published by the Ministry of Finance and figures released by the National Bureau
of Statistics. In the research, central government debt refers to the balance of treasury
bonds, classified by maturity. Bond issuances with a maturity above 1 year are
counted by par value, and short-term discount bonds with a maturity of less than
1 year are counted by the actual amount raised. Treasury bonds are bonds issued by a
country’s central government to raise fiscal funds. They are debt obligations that the
central government issues to investors, by which they promise to pay interest at
stated periods and repay the principal in due time. They funds raised are used
primarily for construction. By issuing treasury bonds, the central government can
effectively pool a great deal of construction funds and accelerate economic growth.
Local Government Debt Some data on local government debt at various levels
since 2007 is publicly available.
Corporate Debt The data were derived from the annual figures published by the
National Bureau of Statistics. Corporate debt refers to debt assumed by enterprises
that can be measured by currency and repaid with assets or labor. It includes both
borrowings between enterprises and interest-bearing debt between enterprises and
financial institutions (mainly banks and trusts). Due to its particularity, we conducted
a separate analysis on the banking sector (and other sectors). We also briefly
compared and analyzed debts of state-owned enterprises.
Household Debt The data were derived from the People’s Bank of China, includ-
ing – but not limited to – loans to residents.
Foreign Debt The data were derived from the National Bureau of Statistics.
Foreign debt refers to borrowings from foreign countries by the Ministry of Finance
18 2 A Study of China’s Total Debt
Fig. 2.1 China’s total debt and GDP
on behalf of the central government. Backed by sovereign credit, it is also called

sovereign foreign debt, and it includes loans from international financial organiza-
tions, loans from foreign governments and foreign currency denominated sovereign
bonds issued overseas.
2.1.3 A Trend Analysis of Debt
Due to limitations on the availability of data, we took the total debt and the debt
levels of various entities from 2003 to 2014 (inflation-adjusted figures, based on the
2003 price) in China for our trend analysis. From the data distribution, we identified
the following characteristics and development trends regarding the total debt and the
debt levels of various entities:
1. The total debt continuously increased.
In recent years, the total debt and the debt levels of various entities have
continually increased. The total debt data calculated with method 1 indicated the
lasting rise of the total debt in the society (Fig. 2.1). Compared with the 2003 level of
RMB 20.37 trillion, the total debt increased to RMB 86.12 trillion in 2013 – almost
twice the GDP of that year (RMB 43.36 trillion). In 2015, it rose to RMB 147.13
trillion, which was seven times that of 2003 and more than twice the GDP of the year
of 2003 (RMB 67.67 trillion). The debt data calculated with method 2 – though
covering a shorter time period – also revealed remarkable growth speed: the total
debt rose from RMB 97.91 trillion in 2007 to RMB 212.5 trillion in 2012, at an
average annual growth of 23.4%. The total debt in 2012 was nearly five times the
GDP of the year of 2012 (RMB 40.41 trillion).
2.1 The Definition and Characteristics of Total Debt 19
Fig. 2.2 The growth rate of China’s total debt
Admittedly, as the latter simply added the debts of various entities, there may
have been double counting that led to an overestimated result. Nonetheless, the
above results show that the total debt in China reached a remarkably high level. The
ratio of China’s total debt to GDP was in line with data from McKinsey and Standard
& Chartered.
2. Debt growth peaked in 2009 and formed a difference from economic growth
like a scissor.
Comparing the growth of total debt with that of GDP during 2004 and 2014, we
can observe that GDP growth generally declined in recent years, but not remarkably.
In contrast, the total debt of the whole society – regardless of calculation method –
declined sharply in 2008, which may be associated with the global financial crisis
that year. In the following year, both growth figures rose quickly to the peak and then
began to fall.
We can divide the whole 2003–2014 period into three stages according to the
characteristics of total debt growth. Before 2008, total debt increased steadily, at a
growth rate ranging from 10% to 20%; between 2008 and 2010, there was high
volatility in total debt; the post-2010 period witnessed the rebound of debt size.
Despite some fluctuation, China’s total debt growth practically returned to its
pre-2008 level (Fig. 2.2).
3. Debt size was correlated with economic growth.
We found a correlation between total debt and GDP, but the driving force of debt
increasingly weakened. The data shows that the correlation coefficient between total
debt and GDP was close to 1, which demonstrates a statistically significant correla-
tion between debt and economic growth and illustrates the role of debt in
boosting GDP.
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individual human being is essentially a process of the formation of
interests in things. Both our formal education, and our informal
intellectual and moral training effected by the influence of social
tradition and mutual intercourse, are processes consisting of an
accumulation of minor modifications which ultimately culminate in the
establishment of more or less unique personal interests in different
aspects of existence. And inasmuch as this process is never
terminated, it is always possible for our previously acquired interests
to undergo such modification as renders them obsolete, and
substitutes novel interests in their places. So far as this is effected,
we rightly say that we are no longer our “old selves.” A new “self” or
centre of unique individual interests has then developed within the
former self.
Usually the process stops short of the point at which all sensible
continuity seems suspended, but that this point can be actually
reached, under exceptional conditions, is shown to superfluity by
such facts as those of “conversion,” to say nothing of the more
pathological phenomena of “multiple personality.” The same
phenomena illustrate the fact that a new individuality, once evolved,
may stand in various relations to the old individual interests it
displaces. It may permanently replace them, or, as in so many cases
of “conversion,” may prove only temporary and pass back again into
the old individuality, or the two may alternate periodically.[159] The one
important point in which all these cases agree is simply the general
one of the production in the course of development of a new
individuality within the first individuality. It may perhaps be suggested
that we have in these features of individual growth a hint as to the
true nature of the process we call the origination of new species by
evolution.[160]
To recapitulate: evolution implies change determined by reference
to an end, and thus constituted into an individual process. Such
“ends” have no meaning, except in so far as the processes of
change are viewed as the progressive attainment of individual
interests, and thus evolution is only possible where there is finite
individuality. This is the philosophical justification for our previous
assertion that evidence of structural evolution, where it can be had,
affords reasonable presumption that what appears to us one thing is
really a true individual of some degree, and not a mere arbitrary
grouping together on our part of states which possess no inner unity.
Further, evolution is a process in which new individuals arise and old
ones disappear. Hence its significance for Metaphysics as excluding
all theories which make Reality consist of a mere plurality of
unchanging finite individuals. It is significant also from another point
of view. Implying, as it so manifestly does, the presence of individual
subjects of experience throughout the physical order, the concept of
Nature as a realm of evolutionary processes is infinitely nearer to the
full truth for Metaphysics than the purely mechanistic view of it as a
mere succession of connected changes.
Consult further:—F. H. Bradley, Appearance and Reality, chaps.

27, 28 (pp. 497, 499, 508 of ed. i. for criticism of concept of
Progress); H. Lotze, Metaphysic, bk. ii. chap. 8 (“Forms of the
Course of Nature,” Eng. trans., vol. ii. pp. 109, 162); J. Royce, The
World and the Individual, Second Series, lect. 5; H. Sidgwick,
Philosophy: its Scope and Relations, lects. 6 and 7 (for some
general consideration of the bearing of evolution on Metaphysics); G.
E. Underhill, “The Limits of Evolution” (in Personal Idealism); J.
Ward, Naturalism and Agnosticism, vol. i. lects. 7-9 (criticism of
Spencer’s evolutionary philosophy), 10 (on biological evolution).
156. It might be objected that, e.g., death is the end of life in the
sense of being its last stage, without being the attainment of the
interests which compose our inner life. But the illustration will not
bear examination. The processes of change within the organism,
when viewed simply as connected changes, do not cease with
death; in fact, they have no end or last state. To call a man’s death
his end only means that the purposes for which we are interested in
the study of his behaviour get complete fulfilment when we have
followed him from the cradle to the grave. He is “done with” at death,
because we have done with him. Only teleological processes can
have a last stage. Note as a consequence of the significance of the
concept of “ends” for evolution, that whereas the purely mechanistic
interpretation of the processes of Nature logically leads to the
thought of them as a continuous series, the series of successive
organic or social types is essentially discontinuous, a point well
brought out by Professor Royce, The World and the Individual,
Second Series, lects. 5, 7.
157. I need hardly remind the reader of the vast difference
between the view inculcated above and the doctrine of “ends in
nature” as it figures in the old-fashioned “argument from design.” The
old-fashioned teleology assumed (1) that the “subjective interests”
manifested in the evolutionary process are fundamentally human.
We, it held, can recognise what these ends are, and further, they are
for the most part summed up in the “design” of furthering our human
convenience. (2) That these interests exist as the reflective designs
of an anthropomorphic Ruler of Nature. Our doctrine is consistent
with neither assumption. It follows from our whole interpretation of
the physical order, that we do not and cannot know what kind of
subjective interest of finite individuals is realised by any portion of it
beyond that constituted by our own bodies and those of our near
congeners, and therefore are absolutely without any right to fancy
ourselves the culminating end of all evolution. Again, a subjective
interest need not exist in the form of a definitely preconceived
design; most of our own interests exist as unreflective cravings and
impulses. Whether any part of the evolutionary process is due to
deliberate reflective design on the part of superhuman intelligences,
Metaphysics, I take it, has no means of deciding. This would be a
question for solution by the same empirical methods which we
employ in detecting the presence of design in the products of human
art. In any case, reflective design is bound up with the time-process,
and cannot therefore be ascribed to the infinite individual.
158. Compare, e.g., the first of the arguments for immortality in
Plato’s Phædo, p. 70 ff., and the remark in the Republic, with
obvious reference to this argument, that the “number of souls is
always the same” (611A). In Plato the doctrine is pretty certainly of
Orphic provenance. Compare also the cyclic alternation of death and
life in Heracleitus, the (Orphic) cycle of births of Empedocles, that of
the Stoics, and in the modern world, to take only one instance, the
“eternal recurrence” of Nietzsche.
159. The same phenomenon of the formation of a new individuality
within the limits of an already existing one, is illustrated by the
familiar facts of the moral conflict between the “higher” and “lower”
self.
160. Compare Royce, The World and the Individual, Second
Series, p. 305 ff., where a view of this kind is worked out in some
detail. Prof. Royce’s second volume unfortunately came into my
hands too late to enable me to make all the use of it I could have
wished; the same is the case with Mr. Underhill’s essay on “The
Limits of Evolution” in Personal Idealism.
CHAPTER VI
THE LOGICAL CHARACTER OF DESCRIPTIVE
SCIENCE
§ 1. Scientific description may be contrasted with philosophical or teleological
interpretation, but the contrast is not absolute. § 2. The primary end of all
scientific description is intercommunication with a view to active co-operation.
Hence all such description is necessarily restricted to objects capable of being
experienced in the same way by a plurality of individuals. § 3. A second end
of scientific description is the economising of intellectual labour by the
creation of general rules for dealing with typical situations in the environment.
In the course of evolution this object becomes partially independent of the
former. § 4. From the interest in formulating general rules arise the three
fundamental postulates of physical science, the postulates of Uniformity,
Mechanical Law, and Causal Determination. § 5. The mechanical view of
physical Nature determined by these three postulates is systematically carried
out only in the abstract science of Mechanics; hence the logical completion of
the descriptive process would mean the reduction of all descriptive science to
Mechanics. That the chemical, biological, and psychological sciences contain
elements which cannot be reduced to mechanical terms, is due to the fact that
their descriptions are inspired by æsthetic and historical as well as by
primarily “scientific” interests. § 6. The analysis of such leading concepts of
mechanical Physics as the Conservation of Mass and of Energy shows them
to have only relative validity.
§ 1. In its general outlines our interpretation of the significance of

the physical order is now complete. We have seen reason to hold
that in that order we have the appearance to our human senses of a
great system or complex of systems composed of purposive sentient
beings, whose interests are for the most part so widely removed
from our own as to preclude all direct intercourse, but who are
nevertheless historically connected with ourselves by that unceasing
process of the development of new forms of individual interest which
we know empirically as the evolution of life and intelligence on our
planet. As we have tried throughout the four preceding chapters to
show in detail, there is no real inconsistency between this general
interpretation of the meaning of the physical order and the working
assumptions of our various empirical sciences. At the same time it is
obvious that in executing the task of the detailed description and
calculation of the phenomenal course of events, the empirical
sciences, while not rejecting such a metaphysical interpretation,
ignore it; and the more conscientiously they exclude from their
programme all amateur excursions into extraneous metaphysical
speculation, the more thoroughly is the work of description and
mathematical formulation done. It seems advisable, therefore, to
conclude our brief sketch of the principles of Cosmology with a short
discussion of the nature of the limitations imposed on empirical
science, by the special character of the objects it sets before it, and
of the way in which the existence of these limitations is revealed by
analysis of the most general concepts of the empirical sciences
themselves.
It is important, in the first place, to be quite clear as to the sense in
which we speak of description as the work of the empirical sciences,
and as to the meaning of the contrast between such description and
a philosophical interpretation of existence. In this connection there
are two points which seem to call for special and repeated emphasis.
(1) The contrast between interpretation and description is not an
absolute one. Complete description would of itself be something
more than mere description, and would pass into philosophical
interpretation. Thus a significant purposive movement is not
adequately described when, e.g., its direction, velocity, momentum,
and duration have been assigned. The complete description of such
a movement would require the recognition of its meaning for the
being executing it as a step in the realisation of a craving or a
design, and would thus merge in what we have called philosophical
interpretation. So generally, if all existence is ultimately experience
and all experience essentially teleological, such description as can
be distinguished from interpretation must always be incomplete from
the logical standpoint, though adequate to fulfil certain special
purposes.
(2) The descriptions of science, again, must be carefully
distinguished from such descriptions as can be effected by the mere
multiplication of unanalysed sensible detail. Scientific description, it
must be remembered, is always description undertaken with a view
to the calculation and prediction of the course of events. This implies
that it must be description in general terms, and, wherever possible,
by the aid of mathematical analysis. Natural processes are described
by the empirical sciences which deal with them, not in their concrete
individual detail, but only in so far as they exhibit certain uniform
aspects permitting of reduction to formulæ suitable for calculation.
Such description is frequently spoken of as explanation, and is
expressly contrasted by this difference in nomenclature with the
mere accumulation of sensible detail. We must not, however, allow
the difference in question to blind us to the essentially descriptive
character of all scientific hypotheses. It is sometimes urged that
scientific explanation must differ in its logical character from
description, because the “substance,” “agencies,” and “media,” in
terms of which explanation is couched, are largely of a kind
inaccessible to sense-perception. It must be remembered, however,
that hypotheses as to such imperceptible objects are only valuable
so far as they serve as connecting-links by which we may calculate
sensible events from sensible data. Whatever intermediate links
empirical science may find it useful to assume, it invariably takes the
sensible occurrences of the phenomenal physical order as the
starting-point, and again as the goal of its inferences.[161] All its
hypothetical constructions are thus subservient to the main interest
of the accurate description of the course of sensible events. The only
kind of “explanation” which can be reasonably contrasted, in respect
of its logical character, with description is teleological interpretation,
and even here the contrast, as we have seen, is not final.
§ 2. We have to ask, then, what is the object at which scientific
descriptions aim? What purpose do they seek to fulfil, and how does
the essential character of this purpose determine the logical
character of the descriptive process? Now, it is at once evident that
all description has for its immediate object one or other of two
practical ends, which are so closely connected as to be ultimately
coincident. Historically, it is beyond a doubt that the original purpose
of all description of physical events was intercommunication with a
view to social co-operation. I have already referred to this function of
description with special reference to the use of causal descriptions in
science, but may conveniently deal with the same point rather more
fully and in a more general way here.
In a society of finite individuals with interrelated aims and objects,
each of the individuals can only attain satisfaction for his own
subjective interests by some degree of concerted action along with
the rest. And concerted action is only possible where the co-
operating individuals can reduce their various views of their common
external environment to common terms, equally intelligible to all, and
similarly indicate to each other their respective special contributions
to the common task. There must be a common understanding of the
difficulty to be met, and of the precise part each is to play in meeting
it. Thus intercommunication between individuals is an indispensable
requisite of all effective practical co-operation.
But again, intercommunication is only possible by means of
description in general terms. Only in so far as there are identical
elements in the experiences of the various individuals can one
communicate the contents of his experience to another. Immediate
feeling, precisely because of its unique individual character, is
essentially incommunicable. Thus in communicating information
about my own body to another, I am of necessity forced to speak of
my body in terms not of the immediate experience I have of it in
organic sensation, but of those complexes of sense-presentations
which he and I alike get through our organs of special perception.
And so the whole physical order can only serve as a basis of co-
operation between individuals so far as it is describable in the last
resort as a complex of sense-presentations equally accessible to the
observation of all the individuals. Any kind of experience of nature
which is uniquely peculiar to myself, and therefore incapable of being
got under assignable conditions by any other individual endowed
with the same organs of perception, is necessarily incommunicable,
and therefore useless as a basis for concerted action. Hence
science is restricted by its very purpose to describe the physical
order in such a way that its descriptions may be available for the
objects of practical art, to the description of it in its phenomenal
aspect as a mere complex of related presentations or possibilities of
presentation. It is no accident, but a logical consequence of the
conditions of intercommunication, that all scientific description must
start from and end with occurrences of the phenomenal order which
any individual may experience by conforming to the prescribed
conditions of perception. Thus we see that it is an epistemological
characteristic of the physical order as investigated by science, that it
consists exclusively of those objects which are, in principle,
perceptible by more than one individual. If there are objects in their
own nature incapable of being experienced by more than one
individual, such as, e.g., my own inner life, those objects cannot
belong to the physical order of science.[162]
§ 3. There is a second purpose of description which arises out of
the first as human experiences become more reflective. Description
not only enables me to communicate the particular situation of the
moment to others, and devise in concert with them means for coping
with it; it also enables me to formulate beforehand general rules for
my own behaviour in recurrent situations of the same type. The need
for the possession of such general views originates, of course, while
description is still confined to its original function in assisting social
co-operation. From the practical point of view of those industrial arts
out of which our various physical sciences have arisen, it is an
economical advantage of the first magnitude to be able once and for
all to formulate a general rule for dealing with the indefinitely
numerous occurrences of typical situations, instead of having to deal
with each occurrence separately as it arises.
The advantages of such general rules speedily make themselves
felt in the increased power and importance enjoyed by the section of
society which is in possession of them, a consideration which may
help us to understand why, in early stages of civilisation, such rules
are commonly jealously guarded as the hereditary secrets of close
corporations.[163] Thus it comes to be the special aim of scientific
description to assist the formulation of general rules for the practical
manipulation of the objects of the physical order. And, with the
progress of reflection, this originally secondary object of the
descriptive process becomes to a large extent independent of the
primary object of intercommunication. Even where I have no need or
no desire for intercommunication and co-operation with my fellows, it
becomes my interest to seek generalised descriptions of typical
situations in the physical order as the basis of practical rules for my
own voluntary intervention in that order.
§ 4. The interest in the formulation of general rules for practical
interference with nature, again, necessarily dictates the form which
our scientific descriptions will take, and is thus the source of those
practical postulates of empirical science with which we have already
made some acquaintance. It compels us to assume, in the first
place, as an indispensable condition of success in our descriptions,
that there are situations in the physical order which may be treated
with sufficient accuracy for our practical purposes, as recurring
identically; in the second place, that, so long as we abstain from
intentional intervention in the course of events, they succeed one
another in a fixed routine order, or, in other words, that there are no
departures in nature from established routine of such a kind as to
interfere with our calculations; in the third place, that every event in
the physical order is, within the limits requisite for our successful
devising of means to our ends, determined by antecedent events. It
is thus our interest in obtaining general rules for the production of
effects in the physical order by intentional interference with it which
is the source of the three fundamental postulates of empirical
physical science, the postulates of uniformity, of the omnipresence of
routine or mechanical “law,” and of the causal determination of
subsequent by antecedent events.
The dependence of physical science upon these three
fundamental postulates thus does not prove their ultimate truth, as
we have already shown at length in preceding chapters: it proves
only that where they cannot be treated as approximately true, within
the limits in which their falsity could be detected by sensible
experiment, our special interest in devising rules for the manipulation
of events cannot be gratified. Conversely, wherever that interest can
be successfully gratified, these postulates must be for all practical
purposes equivalent to the truth. Hence, if we remember that the
ultimate object of all physical science is the successful formulation of
such practical rules for action, we can see that it is a logical
consequence of the character of the interests which dominate our
scientific descriptions, that the physical sciences should adopt a
rigidly mechanical view of the physical order. Only, in proportion as
any one branch of physical science succeeds in carrying out in detail
this conception of the physical order as an interconnected
mechanism of sequences rigidly determined by laws of sequence,
does it succeed in effecting the purposes by which all physical
science has been called into existence. We may thus call the
mechanical conception of the physical order the most general
postulate of physical science. Only, we must once more take care to
recollect that a fundamental postulate of physical science need not in
the least be an ultimate truth; such a postulate is in the end nothing
more than a way of stating the nature of the interest which physical
science subserves, and, as we have sufficiently seen, that interest is
not the purely logical one of consistent thinking, but the practical one
of successful interference with nature.
§ 5. It does not, of course, follow that all the sciences which deal in
any way with the events of the physical order can as a matter of fact
carry out this mechanical view of their objects with equal success. It
is only in the various branches of abstract Mechanics that we get
anything like complete systematic adherence to the postulates of the
mechanical theory of physical nature as previously enumerated. For
the physical, chemical, and still more for the biological sciences, it
remains an unrealised ideal—and one we have no right to think ever
completely realisable—that all the facts of electrical and chemical,
and again of physiological process should be ultimately capable of
reduction to routine uniformities upon which confident calculation
and prediction can be based.
Thus, even in Chemistry, limits are set to the successful adoption
of the purely mechanical point of view, by the fact that chemical
combination is regularly productive of new qualities in the compound
which could not have been predicted from a knowledge of the
properties of its constituents, but have to be ascertained a posteriori
by actual experiment. It is true, no doubt, that we seem to be
increasingly able, as our chemical knowledge advances, to say in
general what properties may be expected to result from the
combination of given elements, but there is no logical ground for
supposing that we shall ever be able to foretell all the properties of
an as yet unexamined compound, and in any case such knowledge
could only be of a general sort. However much we might know, in
advance of the results of the combination of certain elements in
certain proportions, it would still be impossible to predict with
absolute certainty the precise result of trying the combination in a
particular concrete case.
Still less realisable would be the ideal of the reduction of Biology to
applied Mechanics. It is not merely that the isolated physiological
process regularly exhibits qualitative aspects of a chemical or
electrical kind, which we have no right to reduce to mere quantitative
changes. Beyond this, as the very terminology of our evolutionary
hypotheses is enough to show, it is impossible to state the facts of
biological evolution without introducing, under such names as
“sexual selection,” continual reference to a subjective factor, in the
form of the likes and dislikes, habits and cravings of sentient beings,
and this selective factor, being in its own nature incapable of direct
presentation in identical form to a plurality of experiences, is not
even a member of the physical order. With the case of Psychology
we shall be better able to deal in connection with the special
discussions of the following Book. (See especially Bk. IV. chap. 1.)
Considerations of this kind seem to necessitate the following
general view of the logical character of descriptive physical science.
The only science in which the postulates of description are rigidly
carried out to their logical consequences is the science of abstract
Mechanics in its various branches (Statics, Kinetics, etc.). Mechanics
owes its power to follow out these postulates to its abstract
character. Precisely because it regards only those aspects of the
actual physical order which are consistent with the fundamental
postulate of describability by general formulæ, Mechanics is
constrained to be a purely abstract and hypothetical science. For
since every actual process involves the appearance of the
qualitatively novel, and since all concrete quality is in its essence
unique, no actual process can be merely mechanical.
Thus the only way of conceiving the physical order which is
logically consistent with the postulates of descriptive science in their
rigidity, is one which treats all natural changes as reducible to
equations. And it is only in abstract Mechanics that this view is
systematically carried out.[164] Consequently, it is only in so far as all
physical science can be reduced to abstract Mechanics that we can
attain the ultimate purpose of our scientific constructions, the
calculation and prediction of the course of occurrences by means of
general formulæ. This conclusion, derived in the first instance from
reflection on the logical nature of scientific description, is fully borne
out by our actual experience of the results of our scientific theories.
Just because we cannot ultimately reduce all chemical and biological
processes to mere quantitative changes in a material of uniform
quality, we are unable to predict with absolute confidence the precise
result of a concrete chemical experiment, and still more unable to
foretell the precise behaviour of a living organism.
Hence follow two very important results. (1) There is a real
practical justification for the attempt, as far as possible, to treat the
chemical and biological phenomena as if they were simply more
complicated instances of the relations familiar to us in Mechanics.
For though they are not really purely mechanical, it is only in so far
as we can treat them without appreciable error as exactly
measurable that they admit in principle of calculation.
(2) At the same time, there is also ample justification for the use of
qualitative and teleological categories in Chemistry and Biology. For
the interests which chemical and biological knowledge subserve are
not limited by our need for practical rules for intervention in the
course of nature. Over and above this original scientific interest,
which can only be gratified by a mechanical treatment of the subject,
we have an æsthetic interest in the serial grouping of processes
according to their qualitative affinities, and an historical interest in
tracing the successive modifications which have led to the
establishment of a relatively stable form of human social existence.
In so far as the chemical and biological sciences involve the
recognition of qualitative distinctions and the consequent use of
categories which are non-mechanical, it is these æsthetic and
historical interests, and not the primary scientific interest in the
control of natural phenomena, which are subserved by their
elaboration.
Hence, while Chemistry and Biology, even apart from the
possibility of their conversion into branches of applied Mechanics,
are essentially descriptive sciences, the task fulfilled by them, so far
as they use qualitative and teleological categories, is one of æsthetic
and historical rather than of properly scientific description. And
æsthetic and historical description, having another object than that of
purely scientific description, are under no necessity to conform to the
postulates imposed on the latter by the special character of the
interests it aims at satisfying. Thus we can see how the right of
Chemistry and Biology to be regarded as something more than mere
applied Mechanics, can be reconciled with Kant’s profoundly true
assertion that any branch of knowledge contains just so much
science as it contains of Mathematics. When we come, in connection
with the special problems of the following Book, to discuss the aims
and methods of Psychology, we shall find in that study a still more
striking example of the way in which the narrowly “scientific” interest
may play a markedly subordinate part in determining the procedure
of a branch of knowledge which must, because of its systematic
character, be called a “science” in the wider acceptation of the term.
[165]
§ 6. Since it is only complete and all-embracing knowledge which

can be in the last resort a completely self-contained and self-
explaining system, we must expect to find that the concepts
employed in the mechanical interpretation of the physical order lead
us into contradiction the moment we try to treat them as a complete
account of the concrete nature of the whole of Reality. This is shown
more particularly in two ways. On the one hand, the application of
the categories of Mechanics to the whole of Reality leads inevitably
to the indefinite regress. On the other, in their legitimate application
to a lesser part of existence they are all demonstrably relative, that
is, they always appear as one aspect of a fact which has other
aspects, and without these other aspects would have no meaning. It
is worth our while to consider both these points in some detail.
For the successful application of the mechanical view to the
physical order, we need to treat that order as consisting of the
changing configurations of a whole of qualitatively homogeneous
related parts. Any departure from this point of view would involve the
recognition of differences which cannot be treated as merely
quantitative, as mere subjects for calculation and prediction, and
would thus necessitate the introduction of a non-mechanical factor
into our interpretation of the universe. The mechanical view, fully
carried out, thus involves the conception of the universe as a system
extended and ordered in space and time, and capable of spatial and
temporal change, but manifesting a quantitative identity throughout
its changes. In the actual constructions of physical science this
quantitative identity is represented principally by the principles of the
Conservation of Mass and the Conservation of Energy. Both these
latter principles are thus, in their general form, neither axioms of
knowledge nor verifiable empirical facts, but a part of the general
mechanical postulate. There is no ultimate logical principle in virtue
of which we are constrained to think of the particular quantities we
denote as mass and energy as incapable of increase or diminution,
nor again have we any experimental means of proving that those
quantities are more than approximately constant.[166] It is, however, a
necessary condition of success in calculating the course of events,
that there should be some quantitative identity which remains
unaffected in the various processes of physical change, and it is
chiefly in the special forms of the quantitative constancy of Mass and
Energy that we seem at present able to give definite expression to
this a priori postulate of mechanical construction.
Now, with regard to spatial and temporal direction and position, we
have seen already both that they are always relative, position and
direction being only definable with respect to other positions and
directions arbitrarily selected to serve as standards of reference, and
that, when taken as ultimate realities, they involve the indefinite
regress. It only remains to show that the same is true of the other
fundamental concepts of the mechanical scheme, mass and energy.
Taking the two separately, we may deal first of all with the notion of
mass. The mass of a material system is often loosely spoken of as
its “quantity of matter,” but requires, for the purposes of logical
analysis, a more precise definition. Such a definition may be given in
the following way. In order to explain what is meant by the constancy
of the mass of a body, it is necessary to consider the mutual
relations of at least three different bodies, which we will call A, B, and
C. It is found that, at a given distance, in the presence of A, C
receives an acceleration m, and in the presence of B a second
acceleration n; then the mass of A is said to stand to that of B in the
ratio m/n, which is the ratio of the accelerations which they
respectively produce on C, and this ratio is constant, whatever body
we choose for C. Hence, if we arbitrarily take B as our unit for the
measurement of mass, the mass of A as determined by the
foregoing experiment will be represented by the number m. By the
principle of the Conservation of Mass is meant the doctrine that the
ratio m/n as above determined does not alter with the lapse of time.
[167]
That is, the ratio between the accelerations produced by any pair
of bodies or a third body is constant and independent of this third
body itself. This proposition is verifiable approximately by direct
experiment for a particular pair of bodies, but when affirmed as
universally true becomes a part of the general mechanical postulate.
Now, it is obvious from the foregoing explanation of the meaning of
mass (1) that mass is a relative term. It is a name for a certain
constant ratio which requires no less than three distinct terms for its
complete definition. Hence there would be no meaning in ascribing
mass to the whole physical order or “universe.” The “universe” could
only have a mass as a whole if there were some body outside the
universe, but capable of interaction with it, so that we could compare
the relative accelerations, in the presence of this body, of the whole
“physical universe,” and of our arbitrarily selected unit of mass. But
the “universe,” by supposition, contains all physical existence, and
there is therefore no such accelerating body outside it. Hence we
cannot say, without an implicit contradiction, that the whole of
existence possesses the property of mass, nor a fortiori that its mass
is constant. It is only subordinate parts of the universe to which the
principle of the Conservation of Mass can be intelligibly applied.
(2) It is also clear that the mass of a body is only one aspect of a
whole of existence which possesses other aspects, not regarded in
our mechanical constructions. The bodies which actually exhibit a
constant ratio in their accelerations have other properties over and
above the fact of this constant ratio. They have always, in actual fact,
qualitative differences from one another and from other things, which
we disregard in our mechanical treatment of them because they
make no difference to this special property, in which for purposes of
calculation we are peculiarly interested. It is by the barest and most
palpable of abstractions that, in Mechanics, we treat bodies as if they
were masses and nothing more. Thus the facts taken into account by
the mechanical interpretation of nature are, so far as its reduction of
bodies to masses is concerned, a mere aspect of a fuller reality
which we treat as equivalent to the whole for no better reason than
the practical one that it suits a special object of our own that it should
be so equivalent, and that this object is empirically found to be
attained by regarding it as equivalent.
Precisely the same is the case with the complementary concept of
Energy. The kinetic energy, or capacity of a body for doing work
against resistance, is found experimentally to be measured by half
the square of its velocity multiplied by its mass. It is further found by
experiment that, so far as we can measure, the energy of a material
system not acted upon from without remains constant. That the
constancy is absolute is, of course, once more not a matter for direct
empirical proof, but a part of the postulate that the physical order
shall be capable of a mechanical interpretation. Now we can see at
once, from what has been previously said of the concept of Mass,
that the physical order or “universe” as a whole cannot be intelligibly
said to possess kinetic energy, whether constant or otherwise. What
cannot be said to have mass clearly cannot have a property only
explicable in terms of mass. We might indeed have inferred the
same consequence directly from the definition of energy as capacity
for doing “work” in overcoming resistance. The “universe,” having
nothing outside itself, can have no source of possible resistance to
overcome, and therefore cannot be thought of as doing “work.”
Hence, once more, it is only the parts of the physical order,
considered as parts, to which energy can be ascribed.
(3) Again, it is even more evident in the case of energy than in the
case of mass, that we are dealing with one aspect singled out by
abstraction from a whole possessed of other aspects not regarded in
a purely mechanical construction. For (a) the capacity for work of an
actual body does not always exist in the “kinetic” form of actual
motion. There are various forms of non-kinetic energy, such as, e.g.,
the energy of “position” of a resting body, the heat of a body of
higher temperature than its surroundings, which Mechanics treats as
equivalent to “kinetic” energy, because they are theoretically capable
of being converted into it. And these forms of non-kinetic energy are
qualitatively different both from energy of actual motion and from
each other. It is by a mere abstraction that we treat them as identical
because they are, for certain special purposes, equivalent. The
qualitative differences may make no difference with respect to a
particular purpose of our own, but they are none the less really there.
Again, the mechanical scheme itself is quite insufficient to explain
why or when these different forms of energy are replaced by one
another. As has been well said by Professor Ward, the doctrine of
the Conservation of Energy asserts no more than that a certain
quantitative identity is maintained in all exchanges of energy. But
when or in what direction these exchanges shall take place, the
principle itself does not enable us to say. Thus, to take a simple
example: if I know the mass of a stone lodged on a roof, the height
of the roof from the ground, and the acceleration produced by gravity
at the spot in question, I can determine the “potential energy” of the
stone. But my data tell me nothing as to whether this potential
energy will remain for ever in its potential form, or whether the stone
will yet be dislodged and its energy converted into kinetic shape, and
if so, when. The principles of the mechanical interpretation of nature
are thus inadequate to describe the concrete course of events in so
simple a case as that of the fall of a stone. If the stone falls, then by
the aid of the mechanical postulate I can describe one aspect of the
process, namely, the amount of kinetic energy which will be evolved;
and again, if certain previous conditions are fulfilled, e.g., if the
support gives way, and if the descent of the stone is not previously
arrested, the mechanical postulate enables me to infer that the stone
will fall and will reach the ground with just this kinetic energy. But I
can never escape, so long as I keep within the mechanical scheme,
from this necessity of hypothetically assuming as given data which
the mechanical scheme itself cannot fully determine.
All these considerations show how the very nature of the
mechanical scheme itself justifies our previous conclusion, that it is
in all its details simply the expression of a postulate created by our
practical need that the course of nature shall admit of calculation
with sufficient exactitude for the devising of successful rules for
intervention in it, but logically incapable of being without
contradiction regarded as the real truth about any concrete natural
process. The internal evidence, derived from examination of the
fundamental concepts of scientific Mechanism, thus confirms the
view we have already adopted on different grounds, that the whole
physical order is merely the appearance of a more ultimate reality of
a kind akin to our own sentient and purposive life. At the same time,
our examination of mechanism may serve to throw some useful light
on the often misconceived antithesis between Reality and
Appearance. We call the physical order, as conceived by mechanical
science, “appearance,” not because we regard it as illusory or
deceptive in itself, or because it is not the manifestation of a true
reality, but because it takes account only of those particular aspects
of Reality which are important and significant for certain very special
purposes. What appears to us as the physical order is, indeed, true
Reality, and is, in fact, an integral part of the only Reality there is, but
it appears to us in this special form and under these special
restrictions because we have arbitrarily excluded every other aspect
of the concrete facts from our purview by the choice of our initial
postulates of descriptive science. By the nature of the special
questions we put to our world, in our physical science, we determine
in advance for ourselves the general character of the answer we are
to receive.
Rigidly scientific investigation, for instance, finds mechanical
determination everywhere in the world, and purposive spontaneity
nowhere, just because it has previously resolved that it will accept
“mechanical explanation” and nothing else as the answer to its
questions. So far as we bear in mind the presence of these self-
imposed logical limitations throughout our mechanical science, their
existence need lead to no illusion or deception. The success of our
mechanical postulates shows that, within the sphere of their logical
applicability, the course of the world does really conform to them,
and thus the results won by their application are genuine truth, so far
as they go. It is only when we forget the limits set to the logical
applicability of the mechanical postulates, by the special nature of
the interests they subserve, and proceed to treat them as logically
indispensable conditions of all existence and all knowledge, that the
truths of mechanical science are perverted into the illusions and
falsehoods of a mechanical philosophy.
Consult further:—F. H. Bradley, Appearance and Reality, chaps. 11
(Phenomenalism), 22 (Nature); H. Lotze, Metaphysic, bk. ii. chaps.
7, 8; E. Mach, Science of Mechanics, chap. 2, § 5, p. 216 ff.; K.
Pearson, Grammar of Science, chaps. 7, 8; H. Poincaré, La Science
et L’Hypothêse, parts 3 and 4, chaps. 6-10; J. B. Stalle, Concepts
and Theories of Modern Physics, chaps. 2-6, 10-12; J. Ward,
Naturalism and Agnosticism, vol. i. lects. 2-6.
161. And, again, the intermediate links themselves, however

imperceptible, have always to be thought of as exhibiting properties
identical in kind with those of objects given in direct presentation. As
Mill said, a hypothesis which assumes at once an entirely unfamiliar
agent and an equally unfamiliar mode or law of operation, would be
useless. Thus the imperceptibles of scientific hypothesis belong
essentially to the physical order.
162. This is the characteristic selected by Prof. Münsterberg as
the basis of his own distinction between “physical” or
“superindividual” and “psychical” or “individual” objects. See
Grundzüge der Psychologie, i. 15-77.
163. Cf. Mach, Science of Mechanics, p. 4. Mach, however,
erroneously as I think, makes the intercommunication a secondary
consequence of the rise of specialised industrial classes.
164. I.e., the mechanical view of Nature, to be thoroughly self-
consistent, must be purely mechanistic.
165. To put the matter more succinctly, as regards the position of
Chemistry and Biology, we may say that while chemical and
biological facts are never merely mechanical, chemical and
biological science, so far as they subserve the strictly scientific
interest of calculation and the formulation of general rules, must
always be so. The facts only lend themselves to this special purpose
in so far as they admit of being, without sensible error, treated as if
they conformed to the postulates of universal Mechanism. The
special and more difficult case of psychological facts I reserve for
separate discussion in the following Book (infra, Bk. IV. chap. 1).
I am glad to be able to refer the reader, for a view of the logical
worth of the mechanical postulates which appears in principle

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A Study of the Turning Point of China s

Debt Xiaohuang Zhu

Cowpens 1781 Turning point of the American Revolution

Hu■ 1968 A Turning Point of the American War in Vietnam

What s the Point of Math 1st Edition Dk

Emergency Chronicles: Indira Gandhi and Democracy's

The China Study Revised and Expanded Edition The Most

Legal Study on China s Sovereignty over the Nansha

Protection of Health and Safety at the Workplace A

The Turning Point in US-Japan Relations: Hanihara’s

A Study of the Turning Point

Lin Wang Wenqi Wu

ISBN 978-981-13-1324-0 ISBN 978-981-13-1325-7 (eBook)

Library of Congress Control Number: 2018948363

© Springer Nature Singapore Pte Ltd. 2018

Printed on acid-free paper

Debt is an organic component of the macroeconomy. A country or region cannot run

Beijing, China Xiaohuang Zhu

1 Debt and Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

3 A Study of China’s Government Debt . . . . . . . . . . . . . . . . . . . . . . . . 43

5.4 An Analysis of the Elasticity of Debt Effect in Various Industries . . . 109

About the lead author

It is a universal rule that quantitative accumulation will ultimately lead to qualitative

1.1 Theoretical Basis of Debt Studies

1.1.1 Classical Economic Growth Models

© Springer Nature Singapore Pte Ltd. 2018 1

1.1.2 The New Institutional Economics and Economic

1.1.3 The Population Problem in Economic Growth

The importance of increases in workforce, emphasized in the Solow growth model,

1.2 Debt and Economic Growth

capital turnover or to cover an impromptu purchase. Operating payables are closely

1.3 Theoretic Meaning of Turning Point of Debt

1.3.1 Economic Meaning of the Turning Point

‘Turning point’ has different deﬁnitions in mathematics and economics. In mathe-

Fig. 1.1 Kuznets curve

Income Per Capita

1.3.2 Economic Meaning of the Turning Point of Debt

Fig. 1.2 Short-term effect

2. Long-term effect of debt

Fig. 1.3 Long-term effect

If the output in an economy increases by less than the proportional change in

1.4 Research Framework

• A Study of China’s Debt

Debt is a natural component of the macroeconomy, but its sound development

© Springer Nature Singapore Pte Ltd. 2018 15

2.1 The Deﬁnition and Characteristics of Total Debt

2.1.1 Total Debt

2.1.2 The Debt of Various Entities

Fig. 2.1 China’s total debt and GDP

on behalf of the central government. Backed by sovereign credit, it is also called

2.1.3 A Trend Analysis of Debt

Fig. 2.2 The growth rate of China’s total debt

Consult further:—F. H. Bradley, Appearance and Reality, chaps.

§ 1. In its general outlines our interpretation of the significance of

§ 6. Since it is only complete and all-embracing knowledge which

161. And, again, the intermediate links themselves, however

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