Is China Headed for a Debt Crisis?
By HU JIANGYUN
As local government debts pile up, there are concerns about the effects on the Chinese and world economy.
To evaluate the risk posed by such debts, the State Council in 2011 and 2013 instructed the National Audit Office to comprehensively examine the debt status of regional government bodies. The two audits – one from March to May in 2011 and the other August to September in 2013 – examined the debt status of 31 provinces, autonomous regions and municipalities directly under the central government, as well as the five cities specifically designated in the state plan that are given part of the provincial-level authority over economic administration.
In China, government debts are divided into three categories according to the legal responsibility for repayment. The first category is debts that local governments must repay out of fiscal funds. The second category includes debts guaranteed by local governments, who assume responsibility if the borrower defaults. In such case the government is not allowed to pay from fiscal funds, and has to find other sources of money. The third type of debt refers to loans borrowed by public institutions and enterprises for public welfare projects. In this case the local government does not bear repayment responsibility, but if the debtor defaults the local government can provide some financial assistance. The latter two kinds of debts are contingent liabilities.
The two national audits found a continual expansion in government debt. Local government debts rose from RMB 10.72 trillion in 2010 to RMB 15.89 trillion by the end of 2012, and RMB 17.89 trillion by June of 2013. Over the span of two and a half years, provincial government debts surged from RMB 3.21 trillion to RMB 5.19 trillion; municipal debts almost doubled from RMB 4.66 trillion to RMB 7.29 trillion; and similarly county debts climbed from RMB 2.84 trillion to RMB 5.04 trillion.
Of them the amount that local governments directly borrowed rose from RMB 6.71 trillion in 2010, to RMB 9.63 trillion in 2012, and then to RMB 10.89 by the end of June 2013.
Where From?
Governments have assumed debts for various reasons.
Most commonly they borrow to fund local development. During the early years of reform and opening-up, China’s governments at all levels were short of funds. In 1979, eight counties took out loans. Since then, debts directly borrowed or guaranteed by provincial, municipal and county-level governments have gone all the way up. The table shows the division of local government debts according to their uses.
The second reason for surging local government debts is that under the current tax sharing system these governments have limited fiscal revenues, and meanwhile they are prohibited from directly issuing bonds. As a result, local authorities seek alternative sources of finance by setting up regional financing platforms, building development areas, and selling land. After the breakout of the international financial crisis, China adopted an expansionary fiscal policy. Local governments borrowed extensively from financial institutions, leading to a steep growth in local debts.
Official malpractice is a third source of debt. According to the 2013 audit, local governments have illegally borrowed RMB 245.8 billion, guaranteed another RMB 335.9 billion in loans, and raised RMB 43.35 billion more via bonds issued by financing platforms. Of this fund RMB 2.3 billion was invested in the capital market, RMB 7.1 billion went into real estate, and RMB 4.14 billion was spent on government buildings.
Is a Debt Crisis Underway?
In the face of rising debts, is China headed for a debt crisis? Based on available evidence, I conclude that the answer is “No.”
China’s local government debts are intrinsically different from those in Western countries. Unlike Western countries, Chinese governments go into debt not for nonproductive expenditure, but to fund projects to improve living conditions and boost economic development. Based on the table on Page 56, more than 60 percent of public debts are used to fund municipal construction, transport, and land purchase and reserves. According to the 2013 audit, by the end of June 2013 the debts in 34 major cities had become considerable assets like highways, railways, airports and water, heating and electricity utilities, most of which have generated good profits.
Second, China’s local debt obligations remain below internationally accepted alarm levels. There are several internationally recognized debt burden indexes, each of which shows China’s debt levels within the range of acceptable risk. China’s 2012 debt-to-GDP ratio was 39.43 percent, well below the 60 percent mark prescribed by the Maastricht Treaty. External debts stand at 0.91 percent of GDP, far below the international warning line of 20 percent. At the end of 2012 gross government debts was 113.41 percent of government fiscal revenues, while a 90-150 percent ratio is considered safe by IMF standard. The overdue debt ratio, which is the delinquent part in the total balance of public debts, was also at a low level.
