Debt Crisis Is Not China's Destiny
Local government debt recently becomes a hot button issue again. The Ministry of Finance issued a document recently, allowing 10 local governments to issue their own bonds. These local governments must be responsible for the repayment of their bonds. Since this practice of issuing and repaying bonds is a mature one adopted by developed economies, the potential risks of local government debts will be placed under control subject to restrictions from the credit rating market.
Since the U.S. sub-prime crisis and the European sovereign debt crisis were both ignited by government debt and the real estate market, the downturn of the Chinese economy, the second largest in the world, is naturally bound to make people question whether or not China will meet with the same challenge. Such worries should be taken seriously, but debt crisis is by no means predestined for China's economy.
Western countries are self-contradictory when they appraise the Chinese economy. On one hand, they deny China's status of market economy and attribute China's high-speed growth to political power; on the other hand, they conduct analysis of China's economic downturn solely with market economy techniques. Therefore their analysis of, and forecast regarding, the Chinese economy are always not accurate.
Western countries assess China's risks based on the risks they had faced before their crisis happened. They think China cannot avoid this fate. However, debt problems in the United States and Europe are not the same as those faced by China.
The United States has debt problems almost every year, and the federal government even had to be shut down for some time last year. However, such crisis is caused by the struggle between the two U.S. political parties rather than an economic matter. The root cause of the Wall Street crisis was not debt, but the excessive innovation of financial derivatives and the inadequate supervision on investment bank oligarchs. The United States was able to step out of the crisis owing to its strengthened financial supervision, its adoption of quantitative easing measures and the stress it placed on the growth of the real economy. But were individual state governments to owe too much debt, they would not have such a variety of measures to fall back on. Their only recourse would be to declare bankruptcy, as Detroit has done.
The European sovereign debt crisis is different again. Economic development across the different EU members is not balanced, but these countries are enjoying almost the same level of welfare. Southern European countries, whose economies are less developed, naturally have to support the welfare of their people through maintaining high deficits. Thanks to the powerful support of Germany and the more binding European Fiscal Compact, Europe can tide itself over in spite of the difficulty of sovereign debt.
China's local government debt has its own characteristics. According to an auditing report on local government debt issued by the National Audit Office, local government debt in China had totaled 17.9 trillion yuan ($2.9 trillion) by the end of June 2013. Of this, local governments are responsible for repaying 10.89 trillion yuan ($1.76 trillion), accounting for 61 percent; they assume the liability of guarantee for 2.67 trillion yuan ($432.74 billion), accounting for 15 percent; and they may also assume some liability of salvage for 4.34 trillion yuan ($703.4 billion), accounting for 24 percent.
The risk that local governments will be unable to repay the debt really exists, but China has started systematic reform and structural readjustment, with the financial system being the first to be reformed. The craze of credit addiction has been successfully contained, and government debt has been incorporated into the assessment system for local officials. Newly increased local government debt is becoming transparent and the existing debt will be reduced through multiple channels.
Local governments are facing heavy pressure in repaying debt since the total debt amount is huge. However, it is unnecessary for local governments to pay a lump sum for all the debt. In China, it is almost a common assumption that the Central Government is responsible for repaying the debt if local governments cannot. Local governments are facing serious financial pressure since they cannot get enough resources from the Central Government, and local government officials are also faced with pressure of strict achievement assessment, so local governments have to borrow money to develop the economy. Therefore it is not completely unreasonable for the Central Government to pay off local government debt. Against the backdrop of the Central Government possessing sufficient fiscal revenue and the financial system having not yet fully opened, risks concerning local government debt exist only in some areas.
However, this does not mean the Central Government will directly pay off local government debt. The problem should be solved through systematic reform measures, such as incorporating local government debt into the government budget, making newly increased debt transparent, making local governments responsible for repaying their own bonds, reforming the taxation system and increasing transfer payments through public finance.
This is an edited excerpt of an article by Zhang Jingwei, a researcher with the Chahar Institute, published in National Business Daily
109.2 bln yuan
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