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Surprise! China Denies Debt Crisis

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The People’s Daily, the flagship newspaper of the Communist Party in China, ran an editorial yesterday arguing that, contrary to much analysis by both Western and Chinese economists and international organizations, China doesn’t face a debt crisis. But the rationale for that conclusion is a little shaky:

China’s local government debt was primarily used for construction projects, such as the construction of railways, expressways and water facilities. The debts eventually became government assets….

Taking into consideration assets stemming from the debts, the government can afford to repay most of its debts…

The paper thus ruled out the possibility of a local debt crisis in China.

Waving away China’s debt by arguing that infrastructure and construction projects will become profitable state “assets” is a mistake. China has a debt problem because those “assets” aren’t assets, but liabilities. And Beijing disguises and denies those liabilities as a matter of policy. China’s debt is “already out of control,” Zhang Ke, the head of an important Chinese accounting firm, told the Financial Times in April; China’s economy is in “urgent danger,” the IMF warned in July.

The warnings continue with the first part of a FT series out today. For evidence of China’s debt crisis, Simon Rabinovitch writes, just go to Guiyang, one of many heavily indebted cities in China:

The trail of debt in China starts on the desks of ambitious government officials, especially at the municipal level….

To stimulate growth, local officials deployed a simple technique, one replicated throughout the country. The government appropriated rural land on the cheap from farmers, sold it to property developers at a mark-up, and the developers in turn built dense clusters of tower blocks….

In Guiyang, there are at least five official financing vehicles, all established since 2008. If their liabilities are added up, the city’s debt ratio last year would have tripled to 58 per cent of GDP. It’s a similar picture across China: analysts think government debts run anywhere from 40 to 80 per cent of GDP, up at least twofold since the start of the financial crisis.

Guiyang’s investments, like many in similar cities and provinces across China, have not fared well. Beijing keeps the official figures secret (or perhaps the government doesn’t even know the true figures), since by law local governments are not allowed to go into debt. Hence the enormous “shadow banking” industry, which allows local governments to borrow heavily.

One solution might be found in the ideas of Guo Shuqing, who is now the governor of Shandong province. Guo has made a name for himself as a reformist economist and has risen steadily through the ranks of the Communist Party. “A former chief securities regulator and now governor of Shandong province, Guo Shuqing, has launched a range of financial experiments that observers say could become an example for Premier Li Keqiang in overhauling the nation’s financial sector,” the South China Morning Post reports.

But despite his persistence and some support within China, Guo’s ideas haven’t really taken off yet in Shandong, and his previous attempts to reform the central bank and the securities regulator ended in failure when he came up against rigid political resistance from above. Considering yesterday’s People’s Daily editorial, that resistance doesn’t appear to be weakening.

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  • Andrew Allison

    “Considering yesterday’s People’s Daily editorial, that resistance doesn’t appear to be weakening.” For which we should be duly grateful. With a little bit of luck the Chinese government’s refusal to fact facts may cause its economy to implode before ours does for exactly the same reason.

  • lukelea

    My understanding of the Chinese debt situation is like this: the43 is no old-age assistance in China and under the one-child policy parents cannot expect to be cared for by their children. Therefore they save half of their earnings for when they retire. But because the banking system in China is owned by the state, the only place to put their savings is in the state-owned banks, which pay an artificially low rate of interest (sort of like US Savings Bonds during WWII or 3% interest savings accounts in the old Savings and Loan banks). These banks then turn around and lend these workers’ life savings to projects, also at artificially low rates of interest, which have no chance of ever paying off: freeways, sky scrapers, etc.

    This means the money won’t be there when this generation of Chinese workers reach retirement age. For now however any worker who wants to withdraw his savings is able to, even if the bank doesn’t have the cash on hand. How so? The Party has given banks the right to print money right on the premises, or something equivalent, or so I have read. You can imagine how this is going to end. The only mystery is when?

    • f1b0nacc1

      Actually, it is a little different than that…
      As the banks are (for the most part) corrupt and unreliable (there is no real recourse, for instance, if a politically connect – and they are ALL connected – bank simply disappears with your life savings), many Chinese choose to invest in property. You cannot own land, so housing (the newer the better) is a very popular choice….

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