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.