Debt is surely one of the hottest topics in politics around the world. The Coalition government is imposing tough austerity measures in the name of rectifying the country’s debt crisis, both real and imagined. Companies and governments around the world are going through the painful process of deleveraging and repenting for the excesses of the past.
But it is the debt problem in China that is capturing a lot of media attention and causing a lot of sleepless nights for both investors and policymakers. Many of them are still scared from the American subprime meltdown. Analysts are borrowing from terms from the lexicon of the financial crisis -- such as the Lehman moment or the Minsky moment -- to describe the supposedly dire situation in China (There will be no Minsky moment in China, March 25).
China’s local government debt has increased by an average of 20 per cent each year for the last three years. The collective debt of local governments added another 3.8 trillion yuan ($720 billion) to 10.8 trillion yuan by June 2013, according to the latest report from the National Audit Office.
The country’s total debt, which includes both local and central governments, is roughly equal to 54 per cent of the total GDP, which is just below the 60 per cent threshold set by the European Union for admitting new members under the Maastricht Treaty (Solving China's local government debt problem, May 26).
The rapid pace and growing amount of debt is a real challenge for Chinese leaders. But it is not as scary if you look at the data more closely. One of the biggest fallacies in analysing China is to treat it as a monolithic entity. In reality, China is more like the eurozone, with its star economic performers as well as its PIIGS.
When we talk about the country’s economic performance, it is quite useful to explore the large regional disparities. If we apply the same logic to analysing Chinese local government debt data, we get a different perspective.
William Anthalis, a former White House advisor, wrote an insightful essay called New Players on the world stage: Chinese provinces and Indian states for the Brookings Institution (an influential think tank) on the need to understand China and Indian from the bottom up.
“Local leaders are increasingly running much of India and China, home to a third of all humanity, from the bottom up, which means that these countries need to be understood from the inside out,” he wrote.
Allow me to illustrate this with an example. Shandong, a prosperous coastal province, and Chongqing, a mega-city famous for its spicy food, roughly have similar amount of debt: 710bn yuan and 736bn yuan respectively). However, there is a world of difference when it comes to their ability to repay their debts.
Shandong’s provincial GDP was about 5.5 trillion yuan in 2013 and Chongqing’s GDP for the same year was only 1.3 trillion (roughly one quarter of Shandong’s size). On the revenue front, Shandong’s revenue growth was 12.3 per cent and Chongqing actually declined 0.6 per cent. And the former’s coffers were about 2.7 times larger than the latter.
Yang Nong, the deputy chair of the Chinese Association of Inter-bank Traders, says though the two regions are geared to the same level, their ability to repay their debts are so vastly different that it resembles the difference between Germany and Italy, according to his op-ed in Caixin.
He also points to another example: the provinces of Yunan and Gansu. Both roughly carry the same amount of debt but their ability to meet their debts is also markedly different. Tax revenue for Yunan, a prosperous southern province, is 2.6 times more than Gansu, a landlocked and arid province.
The point is that you can’t simply lump all these provinces at different stages of economic developments into a single basket, look at their collective debt to GDP ratio and come to conclusion that debt levels are too high.
This is certainly not to downplay China’s debt problem, which has been growing at 20 per cent. However, it is more telling to look at the country’s debt level at a provincial and even county level to have better appreciation of whether the issue is a regional one or more systematic.
Last but not least, many developed countries have gone into debt to pay for the ever-growing demand for social welfare and other recurring budgetary expenditures. In contrast, most local Chinese governments have borrowed to build infrastructure (although admittedly there are a lot of white elephant projects).
This means when push comes to shove, a lot of local governments can sell off their assets – including cash cows like toll roads and airports -- to meet their debt obligations.