Is China Becoming the New World Creditor? A Study on Global Financial Stability and Liquidity of Governments

摘要

The current economic crisis is revealing which governments are liquid and which governments have accumulated too much debt. The financial failure of the Greek government was the result of too much debt. The question is how much debt is too much for a country? Although government debt was explored in the past no one have ever developed a model to analyze how much debt a country can safely manage. This paper develops a model based on publicly available data that measures a country's liquidity index to determine if the country has taken on too much debt. One hundred and one countries were analyzed and ranked based on their liquidity index. Countries with a negative liquidity index are in trouble of defaulting on their debt. Countries with a liquidity index below the country of Greece (-4.5) should already be in default. Countries with a positive liquidity index have not taken on too much debt. These countries are identified and ranked based on how much debt (liquidity) they still have available. China was specifically examined due to their recent liberal lending policies to foreign countries. Based on the liquidity index for China (0.61), China is managing its debt and still has money to lend. However, China should be careful in future lending because it is close to moving to a negative liquidity.