China’s Ticking Debt Bomb
Image Credit: David Dennis

China’s Ticking Debt Bomb

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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.

Comments
52
Michael Guy
February 25, 2013 at 13:12

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..  .

February 15, 2013 at 12:59

[...] http://www.moneynews.com/StreetTalk/…9/01/id/409412 Sometimes public debt is also well hidden: http://thediplomat.com/2011/07/05/ch…ing-debt-bomb/ Last edited by BMD; Yesterday at 09:03 PM. Reply With [...]

Mark Carleton
January 30, 2013 at 07:05

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.

[...] News: China’s Ticking Debt Bomb  – The [...]

[...] News: China’s Ticking Debt Bomb  – The [...]

DrCruel
October 27, 2012 at 18:42

What he's saying is that the Chinese communists can do with their debt what the US already habitually does – forgive itself, or inflate its way our of it, thereby screwing the small investors and creditors that this debt represents. Given that they are a communist country, I have to agree – they are even in a better position to do this that the US government, because their ideology is openly and proudly prejudiced against "capitalists".
A government that has no qualms about slaughtering its citizens in the streets will have no trouble at all cancelling out their savings. I expect that so long as the Chinese Red Army remains loyal to their mandarins, the nomenklatura will have no trouble living high and secure on the hard work and suffering of everyone else.

DrCruel
October 27, 2012 at 18:33

Depends on which period in Detroit he's talking about. If it's the Detroit of the early 1960s, he's right on the money.

cheeloong8819
October 13, 2012 at 06:56

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.

Gutter Oil
September 8, 2012 at 08:01

you can tell that to the marines dude!

[...] something Minxin Pei has long warned is going to ultimately slow China’s growth: Several interesting questions are raised by the revelation of local government debt in China.  [...]

[...] something Minxin Pei has long warned is going to ultimately slow China’s growth: Several interesting questions are raised by the revelation of local government debt in China.  [...]

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