A side effect of China’s debt binge

China has been on a debt binge lately, fueling its stabilizing growth via hefty lending to national and local state-owned enterprises . Growing concerns about China’s debt levels are reflected in the latest update to our BlackRock Sovereign Risk Index (BSRI) rankings.

China dropped two notches on a modest BSRI score decline in the fourth quarter, and now ranks 35 out of the 50 countries we track. China’s decline was partly driven by a deterioration in its Financial Sector Health , one of the four key components of our index. Rising credit growth has inflated the size of the country’s banking sector relative to gross domestic product (GDP), raising China’s sovereign risk profile, the BSRI suggests.

China’s overall rank has fallen by nine notches since the same quarter a year ago. See the chart below.

Never has a big economy piled up so much debt so quickly (see this interactive graphic ). Yet this is a slow-burning problem, as Isabelle Mateos y Lago notes in her recent post on the driver of China’s more stable growth .

Each country’s final BSRI score and ranking is based on four categories: Fiscal Space (40%), Willingness to Pay (30%), E xternal Finance Position (20%) and Financial Sector Health (10%).

Fiscal Space assesses whether a country is on a fiscally sustainable path, while External Finance Position examines how leveraged a country might be to macroeconomic trade and policy shocks outside of its control. Financial Sector Health measures how healthy a country’s financial sector is, and Willingness to Pay gauges how able and willing a country is to pay off its debt.

Other key movers in this update

The Philippines was the biggest decliner, falling three notches to 26th place. This was mostly driven by a decline in its Fiscal Space score on the back of widening budget deficit projections. An expected narrowing of the country’s current account deficit also weighed on its External Finance Position .

New Zealand fell two spots to 8th place as its Willingness to Pay score declined modestly after the surprise resignation of long-time Prime Minister John Key. Thailand rose two notches in our rankings to 22nd place. An increase in Fiscal Space was the main driver, with Thailand’s primary budget balance now expected to swing into surplus over the coming year. A decrease in perceived political risk and projections of a narrowing current account deficit also helped.

Colombia and Belgium were other notable gainers, both gaining two spots in the rankings. See the world map below for overall scores colored by quintile.

Find the full BSRI rankings in our updated interactive graphic . It has all the details, including country specifics, a global sovereign risk map and the ability to download the underlying data.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog .