China appeared to weather the global economic downturn better than most. But massive local government debt could bring growth to a screeching halt.
China’s remarkable economic rebound after the global economic crisis in 2008-2009 has been a source of envy and puzzlement for the rest of the world. Instead of recession, the Chinese economy has recorded double-digit growth, and is actually showing signs of overheating – a sharp contrast with the stagnation in most Western countries. How did the Chinese do it? Perhaps advocates of ‘Chinese exceptionalism’ are right after all: Beijing has found a secret formula of economic success that has eluded the West.
Part of the answer to this mystery was given in late June by the Chinese government. It turns out that Beijing has managed to keep its economy growing during the global slump by resorting to massive bank lending to local governments, which then went on an infrastructure spending binge that’s certain to haunt the country for years to come. If we remember the causes of the economic crisis that has ravaged the United States and Western Europe, the most important one is something euphemistically termed ‘credit boom’ – excessive lending and borrowing that fuelled housing bubbles and unsustainable consumption. China seems to have been afflicted with the same disease, with only one major variation: much of the debt incurred in China has gone into the infrastructure sector, not consumption. So much for Chinese exceptionalism.
Based on the figure released by the National Audit Office (NAO) at the end of June, local governments have accumulated debts totalling 10.7 trillion renminbi (RMB) or $1.65 trillion – about 27 percent of China’s GDP in 2010. Because the NAO’s figure was based on a sampling of 6,500 local government-backed financial vehicles (out of more than 10,000 such vehicles nationwide), the actual magnitude of local government indebtedness is much greater. The People’s Bank of China, the central bank, recently estimated that local government debt totalled 14 trillion RMB (most of which was owed to banks), almost 30 percent higher than the NAO figure.
Several interesting questions are raised by the revelation of local government debt in China. First and foremost, it has shown that public finance in China is in much worse shape than previously thought. On paper, China’s debt to GDP ratio is under 20 percent, making Beijing a paragon of fiscal virtue compared with profligate Western governments. However, if we factor in various government obligations that are typically counted as public debt, the picture doesn’t look pretty for China. Once local government debts, costs of re-capitalizing state-owned banks, bonds issued by state-owned banks, and railway bonds are included, China’s total debt amounts to 70 to 80 percent of GDP, roughly the level of public debt in the United States and the United Kingdom. Since most of China’s debt has been borrowed in the last decade, China is on an unsustainable trajectory at the current rate of debt accumulation, particularly when economic growth slows down, as it’s expected to do in the coming decade.
Photo Credit: David Dennis
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Michael Guy
The BRIC nations have the good fortune to be led by patriotic, nationalists, leaders who advance the hegemony, productivity and prosperity of the citizens of their own nations. The BRIC nations utilize and capitalize upon treaties , that give them advantage, yet renig renounce or refuse to comply with any treaty or stipulation that is deleterious to their nation's political, mikitary or financial interest. These Machiavellian ;leaders of the BRIC nations, unlike our own politicians, do not betray their own citizens to the interests of the UN, the Saudi Sheiks, International bankers or multi-national corporations.. .
Mark Carleton
After reading the article and all the comments, I feel just a little bit more stupid. It all may as well be written in Chinese for all I can make of it. I think all the barking dogs of gloom miss one essential point; The world, particuarly the financial world, is run by a comparitively small elite. They don't care what we think or feel, national borders are irrelevant, and in the end, they will do as they damn well please. They always have, and they always will.
cheeloong8819
Minxin Pei is another Gordon Chang I'd expect, bias, negative, Western-point of view orientated and distorted insights about China. Interesting though, while I agree, there are debts in China but it is not the kind of issue you can conveniently rationalize from the Western stance. The housing estate have already burst, but the difference is, people within China and outside (with plenty of money) are still investing in these properties and the debt is not overwhelming either. Also, it is true, China pour a lot of it money into infrastructure but it doesn't mean it is not part of the internal consumption plan despite the trend may not be indicating that it is working. Chins is trying to build an economy so that there is a place ready for future internal consumption and innovation. Whatever the billions China spend might sound a lot to you, but its almost nothing for China. As like of any developed economy everything is becomes expensive, this is why China is blowing all their investment now while its cheap otherwise consequences will be more difficult if China leaves it out later.
Frankie Fook-lun Leung
China’s economy and her financial system is not fully integrated with the rest of the world. Hence she can shelter the adverse effects of a melt-down or crisis in a way different from Italy or Ireland. However, one would not expect China to withstand those pressures by standing along and away from the rest of the world. Chinese leaders are worried since their domestic situations of unemployment, social unrests, disparity of wealth, corruption and inefficiency will sooner or later surface, however hard the government try to hide or suppress them.
CorkerG
After reading many of these posts, I understand that my knowledge of government spending and borrowing and how it affects economies is very limited, so please forgive any unusual thoughts I may have concerning this matter.
Private businesses show all assets (revenue, property, land, equipment, vehicles, etc.) to prove solvency, and if I’m not mistaken, governments only show revenue and expenses.
If this is the case, can governments set up their financial program like private companies? Because if they do, then most every large country, especially the United States, Europe, Japan and China must be able to show assets that range into the hundreds of trillions of dollars.
And since many of these governments have assets in this range, then our governments must be completely solvent, especially since the largest debt, that I know of, is only a mere 14/15 trillion dollars (US).
Like I said, I am not aware why governments set up their financials without using all their assets, but would it make more sence for all to show their true solvency?
Muhammad
So you suggest when govt’s don’t have money to repay debt, start giving out land to say other countries to whom the debt is owed to ?
Solvency in this case is availability of cash – or cash equivalent. Of course govt’s should count their cashable assets like Gold reserves in the picture if that is the point.
Beaver
What a great article by someone I usually do not regard very highly, an academic. The notion put out by most elitist academic morons in the Keynesian idiocies they espouse usually reflect a complete absence of the realities of true economic activities. Accolades to profess PEI MINXIN (Wade Giles spelling used here). And even more accolades to the comments, althoug disparate, especially from Pierre, a clear anti-Fed accolyte. There are many of US out here in cyber land, the land of the real entrepreneurs where thoughts and ideas flow like the wind across many state borders and ethnic nations’ diversities. Thank you all for your comments. I will visit “The Diplomat Magazine” again even though I do not post things very often. I have a MENGZI manner.
Cheers,
Beaver
devindra sethi
An instructive article.China is a centralised command economy still with vestiges of the market economy at the fringes.The Chinese Communist Party are no babes in the woods.They have studied the rise and fall of the Soviet Union deeply.Hence the reforms institutionalised by Mr Deng Zhiaou Peng in the eighties were no ‘flash in the pan’calculations.They will last for a century at least and naturally evolve by fine tuning along the way, which incidentally have commenced.In this century the real growth of the Chinese economy at 7plus percent is a virtual certainity.This will enable the countryside to be urbanised and lift millions of rural Chinese residents from poverty.Infrastructure building in towns and villages is the correct path as China emerges from its colonial past to a front line economy of the world in this century.What is happening in China today is similar to the infrastructure build up by USA / EU in the past 200 years.The peaceful growth by China should therefore be encouraged.
The Communist party of China have cleverly adopted a ‘one nation two systems ‘ for HONG KONG & TAIWAN.This is a clever approach in that Chinese Democracy is being allowed to develop and form in these territories and since both regions are not supported financially by the mainland,a thriving market based economy now exists therein.This enables the financial mandarins in Beijing to study the effects of their policies closely.Both territories also have very strong multi billion dollar financial reserves today.This enables the Beijing mandarins to tap resources cheaply as and when required, as noticed by a few economists / entrepreneurs in the recent past.Both HONGKONG & TAIWAN are deeply embeded economies with mainland China today to their advantage. Their role as pressure valves to ease overheating of the mainland economy is simply well crafted.
The expected hard landing of the Chinese economy is unlikely,they will increase internal consumption as India has done and achieve a soft landing for the economy. The Chinese Communist Party are deeply aware that the rural countryside has to be brought in economically, front and center, or lose political power as the communist party of the USSR did.We live in interesting times.
Thomas
Let me get this straigh! China which has a little internal debt while holding $3 trillion dollars in foreign reserves in gonna collapse but the US, running trillions dollars of debt every year with over $60 trillions in debt overall including the cost of medicare for all its baby boomers is an oasis of stability??? LOL
John Chan
China vastly understates its true level of national debt, much of which is already in default: http://www.marketoracle.co.uk/Article28271.html