The Chinese state owes a lot of money – but even in Zhongnanhai, the secluded compound where the Communist Party’s top brass have their headquarters, no one really knows how much.
Sovereign debt issued by the central government in Beijing stands at 8.4 trillion yuan ($1.4 trillion), or 16% of GDP, as of the end of last year – wonderfully low by western standards. But the sovereign has kept its balance sheet clean by unloading responsibilities on to local governments and individual ministries, which then borrow to cover their costs. That means adding up the real level of public debt is a complicated job.
Worried that borrowing may be out of control, the leadership has instructed the National Audit Office to do a comprehensive survey of all the official borrowing out there – something private sector economists have been guessing at for years. A quick review of estimates finds a range from the International Monetary Fund’s lowish 46% to Standard Chartered Bank’s more worrying 78% of GDP.
China has one big advantage over neighbors like South Korea and Indonesia that were laid low by the Asian Financial Crisis in 1997 – almost none of that debt is denominated to foreign currency, or owed to foreigners. That means a Greek-style public debt crisis is hard to imagine, according to Andrew Batson of Dragonomics, a Beijing-based research firm. Instead, the risk is that the government will be tempted either to allow higher inflation to eat away at the value of its debt, or else to keep the financial system highly regulated and prop up weak borrowers indefinitely – pushing down efficiency across the economy and leading towards stagnation.
At 60%, Dragonomics’ estimate for total public debt is in the middle of the pack.
Apart from 8 trillion yuan of sovereign bonds, there could be almost 20 trillion yuan of local government debt out there, according to Standard Chartered’s numbers. Most of China’s provinces, cities and counties are technically not allowed to borrow, but in the two years after Lehman Brothers the central government turned a blind eye as they set up investment vehicles to take out loans on their behalf, mostly to pay for an epic infrastructure splurge. That kept China motoring on through the crisis, but it also left city halls staring at a hefty bill.
The last NAO audit found 10.7 trillion of local government debt as of the end of 2010, and analysts expect a significant jump this time around.
Then there is the Ministry of Railways, which charged China’s (undeniably very good) train network straight to its credit card. That left a 3.1 trillion yuan tab, Standard Chartered counts. The debt was transferred to the newly created train operator, China Railway Corp., which was split off from the ministry in March. But the government says it still stands behind the debt.
And that is not to mention 7.6 trillion yuan of debt issued by China Development Bank and other policy banks, whose main purpose is to further the government’s goals. Analysts disagree about whether the policy bank debt should really be added to the government balance sheet – some of it is lent on to other government entities, so double counting could be an issue. While StanChart includes it the IMF’s low-ball estimate leaves it out – and the railway debt as well.
To round it off, the government is still not quite finished cleaning up the mess from the last bad debt crisis more than a decade ago, when it saved the banks’ bacon by taking bad loans off their hands and assigning them to specially created asset management companies. Those AMCs still have some 1.9 trillion of debt to pay off, StanChart reckons.
The flipside of all this is that, though the Chinese state has a lot of debt, it also has an awful lot of assets it could sell to bail itself out. Local governments have been paying their way with land auctions for years. And when the land runs out there are many thousands of state-owned enterprises that could theoretically be privatized – that is, if they’re not too weighed down with debt themselves.
Then again, the national pension fund is underfunded to the tune of 18.3 trillion yuan, according to a joint study by Deutsche Bank and Bank of China. It will take more than the sale of a few local SOEs to raise that much.
– Richard Silk
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