Claims about China ‘debt mountain’ are full of biased and flawed logic
While hyping China’s local debt issue, foreign media outlets have been using the term “local debt mountain” to sensationalize risks. However, their reports are full of flawed logic and biased misconceptions. China has never neglected the potential risks associated with its debt size. There are many more countries in the world with debt sizes much larger than China’s. Why does foreign media seldom express concerns over these economies’ debt risks, but always focus on China? Unlike Western countries, since the founding of the People’s Republic of China in 1949, China has always had a tradition of balancing its budget, borrowing as little as possible. Since the start of reform and opening-up, China’s understanding of government debt has changed.
It has been found that a reasonable amount of government debt can play a positive role in financing government funds and meeting public investment needs across economic cycles.
Adhering to the principle of spending within its means, China’s government borrowing has provided greater flexibility and diversity of sources for public funds. Based on China’s good credit, for decades, the World Bank, the International Monetary Fund, and the Asian Development Bank have always regarded China as an important cooperation partner.
The central government has always maintained a cautious attitude toward local government borrowing, even when there is a strong demand for funds. In 1998, China faced a huge impact from the Asian financial crisis. Exports, investments, and consumption began to fluctuate. In order to stimulate the economy, the central government implemented an active fiscal policy.
The cautious and effective actions provide financial guarantees to deal with crises when they arise, and they become a new starting point for using government debt funds to support public investment construction. Many highways, high-speed railways, and a large amount of municipal infrastructure across the country are all funded by government debt.
A growing number of developing countries, and even some developed countries, are starting to learn from China’s experience in infrastructure investment. One important aspect is how to leverage the government’s role in fund supply, especially the role of debt financing in infrastructure investment. In this regard, government debt plays a significant role in stabilizing economic operations and conducting strong and effective public investments. Admittedly, public projects require large investments and have long cycles, which have increased the size of government debt. However, they have also created a massive amount of public assets.
The so-called systemic risk often manifests as widespread debt defaults and insolvency in economies, but this is fundamentally absent in the process of local government debt issuance in China. The cash flow generated from large-scale public assets is important guarantees for debt repayment. The size of the local debt stock in China, is below the threshold set by the National People’s Congress. From any perspective, the idea of systemic risk does not exist in China.
On the contrary, the cost of debt financing for local governments in China continues to decrease, and the maturity period has significantly extended. Debt management has been standardized and daily supervision has been continuously strengthened. The pressure on the issuance and operation of local government debts in China has significantly decreased. The earlier irregular and unreasonable borrowing practices have quickly reduced.
China has established a positive incentive mechanism for local government debt management. China does not shy away from addressing hidden debts of local governments, but rather focuses on addressing the root causes of hidden debt. In resolving risks related to local government debt, China identifies key areas and addresses critical issues.