US ex­perts di­vided over China’s lo­cal debts

China Daily (Canada) - - FRONT PAGE - By CHEN WEIHUA in Wash­ing­ton chen­wei­hua@chi­nadai­

While US na­tional debt in ex­cess of $17 tril­lion has been an acute con­cern for their coun­try, Amer­i­can ex­perts have ex­pressed both op­ti­mism and pes­simism at China’s grow­ing lo­cal gov­ern­ment debt, which has been a hot topic in the news me­dia lately.

China’s Na­tional Au­dit Of­fice re­ported in De­cem­ber that China’s lo­cal gov­ern­ment debts had grown to 17.9 tril­lion yuan (about $3 tril­lion) by the end of June 2013, up about 70 per­cent from the 10.7 bil­lion (about $1.8 tril­lion) at the end of 2010.

Ni­cholas Lardy, a se­nior fel­low at the Peter­son In­sti­tute for In­ter­na­tional Eco­nom­ics, is among the op­ti­mists.

He said al­though there are a lot of murky things about lo­cal gov­ern­ment debt and un­cer­tain­ties, peo­ple should pay less at­ten­tion to the mag­ni­tude of the debt and more to its sus­tain­abil­ity.

To Lardy, the bulk of the in­vest­ment, which has been on mu­nic­i­pal con­struc­tion, such as trans­porta­tion, hous­ing and wa­ter, and some on sci­ence and en­vi­ron­men­tal pro­tec­tion, is a good thing.

“I think the great bulk of ex­pen­di­ture looks like it will have high eco­nomic re­turn. China needs more in­fra­struc­tures,” he said, while ad­mit­ting that some in­vest­ment has been used in white ele­phant projects.

The ex­pert on the Chi­nese econ­omy said the prob­lem is that fi­nan­cial re­turns are ex­tremely low and will not be suf­fi­cient enough to pay off the debts. But he said gov­ern­ment should sub­si­dize projects such as sub­way sys­tems, which are a pub­lic good and ben­e­fit every­body.

“The fact that the sub­way sys­tem does not have the means to re­pay does not mean it’s a mis­take,” he said.

Lardy does not ex­clude the pos­si­bil­ity that he may mod­ify his rel­a­tively op­ti­mistic view if he has more de­tails to un­der­stand where the in­vest­ment has gone. “But for the mo­ment, I am rel­a­tively op­ti­mistic,” he said.




se­nior as­so­ci­ate in the Asia pro­gram of Carnegie En­dow­ment for In­ter­na­tional Peace, said the de­cline of in­vest­ment ef­fi­ciency is due to the fact that there is a surge of in­vest­ment in in­te­rior part of China, when the cen­tral gov­ern­ment seeks to pro­mote more eq­ui­table de­vel­op­ment of in­come be­tween the coast and in­te­rior.

Huang, a World Bank coun­try di­rec­tor for China from 1997 to 2004, be­lieves the prob­lem of mount­ing lo­cal gov­ern­ment debt is caused by the small bud­gets in lo­cal gov­ern­ments while tax rev­enues mostly go to the cen­tral gov­ern­ment. As a re­sult, lo­cal gov­ern­ments cre­ate fi­nan­cial arms to raise money, us­ing land as col­lat­eral.

Derek Scis­sors, a res­i­dent scholar at the Amer­i­can En­ter­prise In­sti­tute, is much less op­ti­mistic than Lardy.

He ques­tioned whether those gov­ern­ment num­bers can be trusted when sta­tis­ti­cal bu­reaus al­ways fall be­hind fi­nan­cial in­sti­tu­tions. The debt num­ber re­leased is also based on a nar­row def­i­ni­tion.

He said when the num­bers in China are wrong, it al­ways means China is in worse shape than it rep­re­sents.

“It’s not just China. But fi­nance moves faster than reg­u­la­tions do and faster than sta­tis­ti­cal bu­reaus do. You reg­u­late one type of prod­uct, they cre­ate a new type of prod­uct that you aren’t count­ing,” he said.

Scis­sors be­lieves that the prob­lem is the mount­ing cor­po­rate debt. “I agree that the lo­cal gov­ern­ment debt is not that dan­ger­ous. The cor­po­rate debt is dan­ger­ous,” he said.

But he said an acute cri­sis is not likely be­cause there are no counter par­ties. The bor­row­ers and lenders are of­ten re­lated, or very re­lated par­ties, some­times owned by the same peo­ple, re­fer­ring to the own­er­ship by the gov­ern­ment in the so-called trans­ac­tions.

He de­scribed lo­cal gov­ern­ment debt as China’s “nat­u­ral eco­nomic prob­lem”, some­thing the Chi­nese gov­ern­ment wants to ad­dress but in a slow fash­ion. “The more slowly they do, the more they are ac­cu­mu­lat­ing debts of all kinds,” he said.

Lardy re­minded peo­ple that un­like the US, China does not have a fed­eral sys­tem and the cen­tral gov­ern­ment will as­sume the re­spon­si­bil­ity to re­pay.

In Lardy’s view, China’s lo­cal and cen­tral gov­ern­ment debt ra­tio to GDP at 54 per­cent does not make China an out­lier. “It’s way be­low In­dia’s 71 per­cent and al­most iden­ti­cal with Brazil and Tur­key,” he said.

He also pointed to the huge as­sets of State-owned en­ter­prises, which are more than twice as large as li­a­bil­i­ties.

Still, Lardy warned that the pace of growth of China’s lo­cal gov­ern­ment debt should slow down. “But the prob­a­bil­ity that this is go­ing to cre­ate a fi­nan­cial cri­sis is low,” he said.

Huang, of the Carnegie En­dow­ment, said the poli­cies rolled out af­ter the Third Plenum of the 18th Cen­tral Com­mit­tee of the Com­mu­nist Party of China are po­ten­tially trans­for­ma­tive if they are ac­tu­ally im­ple­mented.

“It will change the na­ture of the Chi­nese econ­omy for the com­ing decades,” he said, re­fer­ring to the an­nounce­ment to give a big say to the mar­ket and con­duct fi­nan­cial re­form that has de­layed for years.

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