Is China the most worrisome debt crisis today?

This week seems to be one for worrying about debt and default. Greece is on the verge of potentially defaulting on obligations owed to the International Monetary Fund, which could lead to the country’s exit from the Eurozone. The U.S. territory of Puerto Rico announced Sunday night that it is unable to pay its debts. And less dramatically, China’s stock market is in turmoil due to the country’s deepening debt problems.

Since June 12 the Shanghai Composite Index, the Chinese equivalent of the Dow Jones index, has fallen by 21 percent. In two-and-a-half weeks, the Chinese stock market has lost a fifth of its value, equal to the combined value of the Spanish stock market. To be sure, the many financial barriers to international investment in Chinese stocks makes the comparison with Spain less alarming, yet the sheer size of China’s economy and its growing domestic debt levels is exceedingly worrisome. What explains the tremendous drop off in Chinese equity prices? Like Greece and Puerto Rico, it’s debt. But in China’s case, it’s the private variety.

Chinese policymakers responded to the stock market downswing last week by cutting interest rates and reducing the amount reserves that banks need to have on hand. This loosening of credit should help the stock market, as much of the increase in equity values prior to the recent downturn was fueled by credit. As finance correspondent Gwynn Guilford details, the margin financing of stock purchases has been the main conduit allowing firms and investors to buy stocks with borrowed money. More margin lending by China’s banks should help prop up Chinese equities in the short term, but that’s not a sustainable, long-term solution.

The short-term collapse in stock prices is symptomatic of larger problems with the Chinese economy: slowing (perhaps sharply slowing) economic growth and high debt levels across most of the economy. The growth in China’s gross domestic product has been slowing recently, with GDP growth at its lowest rate in 6 years and some signs of deflation emerging. At the same time, policymakers are grappling with the large amount of private debt in the economy. Since 2008, China has seen a significant increase in private debt as a share of GDP. This increase has been due to companies, specifically those owned by municipal governments, loading up on debt and investing in real estate and infrastructure projects.

There was hope at one time that Chinese policymakers would let firms go bankrupt rather than prop them up with debt—the seeming default of Chaori Solar, a solar company, in 2014 was seen as a positive step forward. But, as The Economist notes, the bondholders of the company were eventually bailed out. Instead, the central government is aiding the bailout of municipal governments by encouraging them to issue bonds that their bank creditors can purchase and then redeem at the Peoples Bank of China, the central bank, as part of their reserve requirements.

The speculative nature of many of these investments and the role of credit should be concerning for anyone who has read recent research on financial bubbles. Even if the stock market situation in China doesn’t fit the classic definition of a bubble, the credit-fueled nature of its current economic growth should be some cause for concern. In the search for growth, Chinese policymakers might bail out firms and local governments and create an unsustainable zombie financial system similar to what Japan did during the 1990s. Given that China is one of the two largest economies in the world, that should be a concern for everyone.