China's growing external debt has once again set off alarm bells.

The State Administration of Foreign Exchange (SAFE) said the country had $823 billion of external debt at the end of Q3 — about 9% of GDP.

Some have argued that this is evidence of desperation, and that China is now borrowing money from foreigners, having maxed out on domestic credit.

Pointing to China’s international investment position (IIP) data, Standard Chartered's Stephen Green writes that this measure is the most "comprehensive measure of the total liabilities that China Inc. owes the world," and that "China's liabilities are dominated by foreign direct investment (FDI), the best kind of liability."



The IIP data puts all of China's liabilities to the world at $3.8 trillion as of September 2013, or about 43% of GDP. This number is much bigger than SAFE's for a few key reasons. 1. SAFE does include liabilities denominated in foreign currencies, but not those denominated in offshore yuan. 2. It excludes FDI.

But a breakdown of IIP data shows that the largest part of this debt is driven by FDI which amounted to $2.3 trillion at the end of 2013. Portfolio investment totaled $347 billion. The remaining $1.1 trillion is driven by trade credit, loans from foreign creditors, and deposits of foreign firms in China.

"There has been no significant increase in China’s liabilities with the rest of the world – and when FDI is excluded, the absolute number is small and flat," writes Green. "No impending cataclysm here."

Total foreign debt as a percent of GDP shows "no sign of a substantial ramp-up in borrowing from offshore."

China's foreign bank loans to China amount to 10% of GDP, one of the lowest among emerging markets.





The one thing to watch is the pace at which the stock of cross-border loans is growing, currently up 50% year-over-year.

But the recent debt expansion "has been the normalization of what was an abnormal situation: a massive economy shutting itself off from offshore funding sources," writes Green.

Foreign borrowing of 10-14% of GDP is perfectly normal for the world's second largest economy and one that plans to become an international investor, according to Green.