Is China as Debt Laden as Greece?

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Macroeconomics

There have been numerous dire warnings in the western press over the last 6-9 months about the Chinese economy. Talk has centered on a housing bubble, inflation in wages and a generally over-heated economy. There have even been questions raised about how sound many of the loans made as part of the government inspired stimulus measures will prove to be in the longer term. But on the whole Beijing has brushed such comments aside and assured the world that everything is well. So it is intriguing to see Liu Jiayi, head of China’s National Audit Office go public with a warning that the financial crisis has left some Chinese provinces with serious debt problems. “The scale is large, and the burden is quite heavy,” he is reported as saying in a Telegraph article quoting from the office’s annual report to the Chinese government. In the past, local government debts have been considered state secrets and details have not been available.

Chinese provinces are, in some cases, equivalent in size to major European countries and run with a degree of fiscal autonomy. The southern province of Guangdong, for example, has the same population size as Germany although a much lower per capita GDP at the moment. All this means though is that although their spending on infrastructure for example has been vast, their ability to raise revenues is that much lower and yet many local governments have run up debts of 100% of local GDP with the highest reaching 365%. That makes them more fiscally challenged than Greece at 130% and puts the US at 90% in a comparatively good light.

The article further quotes Mr Liu as saying the audited debts of 18 of China’s 22 provinces, together with 16 cities and 36 counties amounted to 2.79 trillion yuan ($415bn) in 2009. Several observers believe the situation is far worse. The China Daily newspaper, said the total sum could add up to between 6 trillion and 11 trillion yuan ($885bn-$1.62 trillion). Estimates already put this at some 70% of China’s GDP last year.

The situation is made worse by the degree to which much of the debt is carried off balance sheet in the form of public-private investment vehicles and so makes measurement difficult. Last month, the State Council ordered local governments to stop using special vehicles and to shut down the public-private partnerships as soon as possible.

How bad is the problem? It’s too early to say for sure. China has an ability to hide debts and nurse banks and state bodies along that would be considered insolvent in a more open and transparent commercial environment. Victor Shih, a professor at Northwestern University, is forecasting government debt to hit 96% of GDP as infrastructure projects continue to eat up cash and produce negligible returns. “The worst case is a pretty large-scale financial crisis around 2012,” he is quoted as saying. “The slowdown would last two years and maybe longer.” Let’s hope for all of us it doesn’t come to that.

–Stuart Burns

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