Econ­o­mist: China has debt prob­lem, but no cri­sis


Li Yang, the in­flu­en­tial Chi­nese econ­o­mist, in­sists the world’s sec­ond-largest econ­omy is not fac­ing a debt cri­sis.

The 65-year-old chair­man of the Na­tional In­sti­tu­tion for Fi­nance and De­vel­op­ment, a lead­ing think tank, said com­men­ta­tors al­ways un­der­es­ti­mate the coun­try’s huge as­set base.

“I am not say­ing that China does not have a debt prob­lem, but what we have now is far from a cri­sis,” he said.

Li, for­mer vice-pres­i­dent of the Chi­nese Acad­emy of So­cial Sci­ences and five-time win­ner of the Sun Ye­fang Eco­nomics Prize, China’s high­est award in the field, was speak­ing in his of­fices in the Jing­guang Cen­ter in the Hu­jialou area of Bei­jing.

Many an­a­lysts get their as­sess­ments wrong, he said, be­cause the gov­ern­ment’s debt prob­lem can’t be un­der­stood by sim­ply look­ing at the debt-to-GDP ra­tio.

By that mea­sure China’s debt is at a his­tor­i­cal high — 249 per­cent at the end of last year, ac­cord­ing to the NIFD.

“The prob­lem with this anal­y­sis is that debt is a stock and GDP is es­sen­tially a flow. If we use this mea­sure, it is not in any way a sci­en­tific ex­pla­na­tion of the real sit­u­a­tion,” he said. “We ei­ther need to mea­sure debt as a stock to stock or a flow to flow.”

The work of Li’s think tank, one of 25 with na­tional level sta­tus ap­proved by the cen­tral gov­ern­ment in 2015, has been to an­a­lyze the Chi­nese econ­omy’s as­sets. It has pub­lished its re­search in two vol­umes, The Na­tional Bal­ance Sheet of China, in both 2013 and 2015.

With a team of seven full-time re­searchers, it con­ducted what is be­lieved to be the most com­pre­hen­sive re­search into this area ever un­der­taken.

“We have so far col­lected more than 10 years of data to look at the real com­po­si­tion of China’s as­sets,” he said. “Start­ing next year we will be pro­duc­ing our re­search an­nu­ally, with an up­dated vol­ume ev­ery year.”

By the end of 2015, ac­cord­ing to the in­sti­tu­tion’s lat­est data, China had some 229.4 tril­lion yuan ($33.3 tril­lion) of as­sets and 126.2 tril­lion yuan of debt, re­sult­ing it net as­sets of 103.2 tril­lion yuan.

Of th­ese net as­sets, 16.6 tril­lion yuan was owned by the cen­tral gov­ern­ment and 69.1 tril­lion yuan by lo­cal gov­ern­ments.

Ac­cord­ing to the same cal­cu­la­tion, some 20.7 tril­lion yuan were held in highly-liq­uid as­sets, in­clud­ing pre­cious met­als such as gold and sil­ver, and in in­vest­ments in for­eign com­pa­nies listed on over­seas ex­changes.

“This high de­gree of liq­uid­ity puts China in a strong po­si­tion to deal with any cri­sis,” Li said.

One of the as­pects that dif­fer­en­ti­ates China’s debt from that of many West­ern coun­tries is that it is in­vested in things that are tan­gi­ble and that pro­duce an in­come such as in­fra­struc­ture, rather than fund­ing pen­sions and other on­go­ing ex­penses — which he says is par­tic­u­larly the case in the United States and most de­vel­oped economies.

“With eco­nomic growth slow­ing and in­vest­ment re­turn de­clin­ing, the gov­ern­ment’s rev­enue is shrink­ing but we have this huge amount of ac­cu­mu­lated wealth — net as­sets to cover the shrink­ing rev­enue stream,” he said, adding that in­vest­ment in in­fra­struc­ture, although not al­ways in­come gen­er­at­ing in it­self, can trig­ger other rev­enues:

“If you take the case of Shang­hai, if a tun­nel is built un­der the Huangpu River, it may not gen­er­ate rev­enue di­rectly for the mu­nic­i­pal­ity but it makes busi­nesses more ef­fi­cient and peo­ple’s lives more con­ve­nient. And the value of the land at both ends might rocket, bring­ing in rev­enue for lo­cal gov­ern­ment.”

Li said there are in­creas­ing op­por­tu­ni­ties for lo­cal gov­ern­ments to cre­ate in­come from in­fra­struc­ture through pub­lic pri­vate part­ner­ships.

“Through such part­ner­ships, pri­vate com­pa­nies can help gen­er­ate rev­enues for lo­cal gov­ern­ments,” he said.

Li, whose ed­u­ca­tion was in­ter­rupted by the “cul­tural rev­o­lu­tion” (1966-76), even­tu­ally grad­u­ated in eco­nomics from An­hui Univer­sity in his na­tive prov­ince in 1981.

He went on to earn his mas­ter’s de­gree at Fu­dan Univer­sity in Shang­hai be­fore com­plet­ing a doc­tor­ate at Ren­min Univer­sity of China in Bei­jing.

He then spent a year as a vis­it­ing econ­o­mist at Columbia Univer­sity in New York in the late 1990s be­fore re­turn­ing to China to work at the in­flu­en­tial so­cial sci­ences acad­emy, where he rose to vice-pres­i­dent. The Na­tional In­sti­tu­tion for Fi­nance and De­vel­op­ment is also part of CASS.

Over a long ca­reer he has writ­ten more than 400 the­ses and work­ing pa­pers and par­tic­i­pated in 50 statelevel re­search projects.

He be­lieves the view that many of the prob­lems now fac­ing the Chi­nese econ­omy — boil­ing down to the gov­ern­ment’s 4 tril­lion yuan stim­u­lus pack­age im­ple­mented af­ter the global fi­nan­cial cri­sis in 2009 — does not re­flect the true con­di­tion of the coun­try.

“There was prob­a­bly only 1.1 tril­lion yuan ever ac­tu­ally spent, and much of that was al­ready in the plan so it was not ad­di­tional ex­pen­di­ture,” he said.

This high de­gree of liq­uid­ity puts China in a strong po­si­tion to deal with any cri­sis.”

Li Yang, chair­man of the Na­tional In­sti­tu­tion for Fi­nance and De­vel­op­ment

He dis­puted the view of Ts­inghua Univer­sity pro­fes­sor of fi­nance Zhu Ning ex­pressed in his new book, China’s Guar­an­teed Bub­ble, that there is lit­tle con­cept of debt risk in China be­cause there is an im­plicit guar­an­tee the cen­tral gov­ern­ment will al­ways come to the res­cue.

He in­sisted there has been no equiv­a­lent ex­am­ple in China to the US bail­ing out Fan­nie Mae and Fred­die Mac, the en­ti­ties at the heart of its mort­gage cri­sis.

“The US gov­ern­ment bought their as­sets when they were in a quag­mire, and that is why the debt prob­lem in the US shifted from pri­vate en­ter­prises to the gov­ern­ment.”

Li, how­ever, fully ac­knowl­edged that China is not im­mune from a debt cri­sis and, in fact, ex­pe­ri­enced one af­ter the Asian fi­nan­cial cri­sis when GDP growth sud­denly slumped to 4 per­cent.

“At the time, the West­ern me­dia said that we were head­ing for bankruptcy and Chi­nese in­sti­tu­tions were go­ing broke. We spent around 5 tril­lion yuan of our stock in as­sets, how­ever, to ab­sorb al­most all the non-per­forms’ debt.”

Li said he be­lieves that, un­like the economies di­rectly af­fected by the Asian fi­nan­cial cri­sis, China’s debt is owed in­ter­nally within its own fi­nan­cial sys­tem, giv­ing it ex­tra in­sur­ance against any cri­sis.

“If you look at Ja­pan now, it has a huge debt-to-GDP ra­tio, but it doesn’t have a debt cri­sis be­cause much of its debt is owed in­ter­nally. Many Euro­pean coun­tries have a lower level of debt, but they have no as­sets and have to bor­row money from other coun­tries. They are in a far worse po­si­tion.”

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