OPINION

Alarm Bells and the U.S. Debt Crisis

The United States finally averted a debt default on October 17. If it happened, the U.S. credit rating would have likely been downgraded, with the financial market collapsing, dollar-denominated assets plunging, consumer credit crippled and bank credit exhausted.

China had bought U.S. government bonds worth $1.27 trillion at the end of July. If the United States defaulted on its debt, China would undoubtedly suffer. Zhu Guangyao, China's Vice Finance Minister, called for the U.S. Government to take credible steps to ensure the safety of Chinese investments and the interest payments of government bonds should the default become reality.

The U.S. debt problem is a lesson for China. First, China should diversify its holdings and disperse investment in financial products to avoid similar risk and danger. Of course, theoretically speaking, China can also threaten to sell off its U.S. bonds, which would cause U.S. Treasury bonds to plummet and incur more losses for China.

Hence, China needs to gradually rein in its holding of U.S. Treasury bonds by dispersing its investments, closing the trade surplus gap, restraining the rapid growth of foreign exchange reserves, hastening steps to open its capital account and reducing limitations on overseas investment by domestic residents.

Second, China's local government debt is more worrying compared with the U.S. debt crisis. In June, the National Audit Office announced that 36 local governments owed debt of 3.85 trillion yuan ($631.2 billion). Among them, 16 saw a debt ratio exceeding 100 percent, with the highest hitting 219 percent. In terms of urban construction investment bonds, the Yangtze River Delta region tops the list with an overall debt ratio of more than 200 percent.

Though the potential for a default by the U.S. Government is worrisome, the public has knowledge of its origins and possible solutions. In contrast, China's local government debt is a mess and the specifics are few. If U.S. debt can be likened to a man pushed to the edge of a cliff and is aware of the distance to the bottom, China's local government debt is a man with his back to the cliff.

Third, government budgets should be transparent and open to supervision. Superficially, bipartisanship is the culprit that has led to the shutting down of the U.S. Government. Yet, it was all due to a budget from one wing of the U.S. Congress that must receive approval from another. This ensures that the government can't issue bonds of its own will, nor will it dare waste public money.

Why is it that China's local governments extravagantly spend taxpayers' money on vanity projects? Local people's congresses fail to play a supervisory role in keeping government budgets in check. Only when they act much like the U.S. Congress does in supervising the White House could taxpayers' money be spent in an efficient way.

This is an edited excerpt of an article published in Economic Information Daily 

THE MARKETS

Soaring Land Supply

China's residential land supply totaled 91,700 hectares in the first nine months, an increase of 28.4 percent year on year, according to the data released on October 16 by the Ministry of Land and Resources.

The land supply for commodity housing hit 71,300 hectares, up 7.3 percent year on year.

Four first-tier cities, Beijing, Guangzhou, Shanghai and Shenzhen, all saw land supply increases in the January-September period, and will continue to enhance land supply in the fourth quarter.

In the first three quarters, the land supply for commodity housing in Beijing stood at 589 hectares, up 128 percent from a year ago, while the land supply in Shanghai, Guangzhou and Shenzhen reached 789, 526, and 115 hectares, respectively.

Eyeing More Market Share

Nu Skin Enterprise (NSE), a personal-care products maker, plans to invest close to $200 million in building stores and manufacturing facilities in China next year, to keep up with rising demand, said NSE President and CEO Truman Hunt.

The New York-listed company has invested over 450 million yuan ($73.8 million) in building a new office in Shanghai, its largest ever foreign investment, according to Hunt.

Greater China which includes the mainland, Hong Kong and Taiwan, reported $450 million in sales revenue for the first half of this year. It was the biggest revenue contributor for the company.

NSE was the first foreign-invested direct selling company licensed to do business in China. So far, the company has acquired admission to operate in 19 provinces and regions.

NUMBERS

101

Number of mergers and acquisitions (M&As) on the Chinese market in September. All but nine revealed their transaction value, totaling $10.18 billion

94

Number of M&As among domestic companies in September. All but seven revealed their transaction value, totaling $2.8 billion

$7.12 bln

Transaction value of M&As in the food and beverage sector during September

Email us at: yushujun@bjreview.com