A Reply to My Critics on Local Debt

Since the publication of my editorial in the Asian Wall Street Journal on local debt, there has been a wave of interest on this issue.  Several investment banks have issued reports on local debt, and some of them have disputed my main finding that current local government investment vehicle debt stands at around 11.4 trillion RMB.  The World Bank likewise addressed this issue and came up with a much lower estimate on local investment company (LIC) debt.  In the discussion below, I outline some reasons why I still adhere to my estimate that existing local investment vehicle debt stands at around 11 trillion RMB.  Furthermore, I once again reiterate that local debt is a serious problem which will require decisive actions from the Chinese government.

Looming Problem of Local Debt in China– 1.6 Trillion Dollars and Rising

Did China accomplish the impossible?  Did it generate almost 9% growth and maintain low debt to GDP ratio even as its exports plummeted by 20%?  What about claims that the torrent of investment in China has come without too much leveraging? After spending half a year looking into the debt level of local government investment entities– some 8000 of them– my conclusion is no. 

Let’s Look at China’s Liabilities Again

Recently, on a China specialist bulletin board, the debate on “the China collapse” hypothesis flared up again.  As you can imagine, things got pretty heated between my colleagues.  I have learned that predicting the future is a losing game, but we can certainly look at facts and bring in some skepticism.  Incidentally, I am working on a project to calculate the extent of borrowing from local government investment entities, which are discussed below.  I am about half way through the provinces, but will update interested readers on my findings in the coming months. Below is my contribution to the “collapse” debate.  

Chiming in among the skeptics, I think we tend to focus on the asset side of China’s balance sheet, which is quite impressive to be sure.  However, the Chinese government is also good at hiding its various liabilities (in the accounting sense) through various entities and strategies.  Let’s ignore human costs like reduced life expectancy from the environment, lack of social services and work safety for the moment and only focus on financial liabilities.  Among the OECD countries, we see that public debt escalated tremendously due to stimulus programs and financial bailouts. However, it would be mistaken to argue that China accomplished 9% growth without getting into massive debt.  In fact, it got into much more de facto public debt as a share of GDP than the US or Europe did.

A Tidal Wave of New Credit in China

Below is my recent editorial appearing in the Asian and European Wall Street Journal.  My point is that rapid credit expansion is nothing new, but rapid credit expansion without any sign of central government reaction is new and worrisome.  This level of credit expansion is clearly unsustainable, so why not signal some desire to reverse course at some point?

China Takes the Brakes Off


The official Chinese press recently issued a series of stories celebrating an apparent recovery of the country’s growth rate to 8%. By all appearances, China has once again deployed its enormous state capacity, including state control of the banking system, to ward off a recession. However, unlike the last major stimulus program in the late 1990s, this stimulus relies on an unconstrained credit expansion and is generating much fewer marginal benefits to the economy. Quite the opposite: Out-of-control credit expansion contains the seeds of future financial problems.

Chinese Banks Are Not Good Students

Peter Goodman, whose columns are always concise and well informed, wrote yet another stinging critique of American banks entitled “Lessons the Teacher Forgot.”  The basic argument of the piece is that US banks increasingly behaved like Chinese banks, which were supposed to learn market discipline from their teachers.  His observations of Chinese banks were also […]

Deflation, Lending Slow-down in China, Now What?

The recently published PBOC Monetary Policy Report is filled with optimism.  Growth is strong; investment is on the rise; even export is looking better….etc.  Then, I noticed something strange about the report.  Throughout the original Chinese version of the report, CPI is referred to as “CPI,” and the figure for 1Q wasn’t so bad at -0.6%.  However, the figure for PPI was only mentioned in Chinese “生产价格” and only in a brief discussion under a large green box on page 36.  The PPI figures for 1Q was horrendous! The price of industrial goods fell by 3.3%, 4.5%, and 6% in January, February, and March respectively.  So deflationary pressure is getting worse, not better.  In terms of commodities and energy prices, the trend for January through March was -5.3%, -7.1%, and -8.9%, again showing a negative trend.  To give the PBOC credit, someone actually put the PPI figures for a number of products on their English website: http://www.pbc.gov.cn/english/detail.asp?col=6400&id=1346

What did 5 Trillion RMB Buy?

I have been getting a wave of bullish sell side reports about how the stimulus program launched late last year is having an unexpectedly good impact on leading indicators in China.  Before we draw quick conclusions about how rosy everything will be, let’s step back and examine what these figures are actually telling us.  In essence, most of the benefits of pumping 5 trillion into the economy are temporary.  When this pace of lending slows, many benefits will reverse into major problems.

Hu Jintao Said….

At a meeting between Hu Jintao and Guangdong delegates to the NPC session this year, Hu was quoted as saying: “现在许多国家说中国好,希望中国出来,坦率地讲我们还是发展中国家,你别看我们有近2万亿的外汇储备,拿13亿人除,一个人还有多少啊。所以,我们确实需要把自己的事情办好。” “Now many countries are saying that China is good and hope that China will emerge (to help them), but honestly we are still a developing country. Don’t over estimate the fact that we have […]

Are Unemployed Migrant Workers Similar to Laid Off SOE Workers?

I have been engaged in a discussion with an esteemed colleague on whether the current wave of migrant worker unemployment is similar to the last wave of unemployment, which took place in the late 90s when millions of state-owned enterprise (SOE) workers were laid off.  The argument seems straight-forward.  Back then, tens of millions (even […]

Unemployment in China…Oh Boy

In a press conference today, the vice head of the office of the Central Finance and Economic Leading Group (see this paper for what this organization is–it’s powerful) Chen Xiwen revealed some important figures on unemployment.  In a previous post, I speculated on an unemployment figure that was 35 million by the end of first quarter of 2009.  According to confirmed figures, we have already surpassed that figure.  For the sake of completeness, I translate the relevant passages verbatim:

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