http://www.arabnews.com/?page=7§ion=0&article=124938&d=28&m=7&y=2009&pix=opinion.jpg&category=Opinion
Tuesday 28 July 2009 (06 Sha`ban 1430)
Hidden from sight, China debt mounts
Simon Rabinovitch I Reuters
ON the surface, China presents a fiscal study in contrast with the United
States, keeping a remarkably low ceiling on debt even as it spends its way out
of the financial crisis. But when Chinese leaders meet their US counterparts
this week, they should pause for reflection before venting any criticism,
because hidden liabilities mean China's books are uglier - potentially much
uglier - than at first sight.
Thanks to successive years of fast economic growth and even faster
government revenue growth, the official debt-to-GDP ratio was 17.7 percent at
the end of last year, far lower than almost any other major economy.
The trouble is that excludes local government borrowing, the current
surge in loans backstopped by Beijing and bad assets cleared from the banking
system but still floating about.
When all are thrown into the pot, analysts estimate that China's debt may
be closer to 60 percent of GDP, putting it in virtually the same league as the
United States, which was at 70 percent at the end of 2008 before it launched
its massive economic stimulus program.
To be sure, Washington is now set on a path of exploding debt that
Beijing will largely avoid. The United States budgeted for a federal deficit of
12.9 percent of GDP this year, whereas China is aiming for just 2.9 percent.
But China's finances are deteriorating more quickly than the government
expected, fueling a rise in the stock of both explicit and disguised debt that
will constrict its wriggle room.
"It is serious because, one, much of it is hidden and, two, local
governments are currently doubling down on their bets," said Stephen Green,
economist at Standard Chartered Bank in Shanghai. "As with all fiscal deficits,
it limits space for further stimulus."
This is probably a moot point, for now. With China's economy back on
track and private-sector investment kicking in, few think Beijing will need to
ramp up spending beyond its existing 4 trillion yuan ($585 billion), two-year
stimulus plan. But the narrowing of options still discomfits Chinese leaders.
"Our fiscal work is very grim," Chinese Premier Wen Jiabao told officials last
week.
Government revenues declined 2.4 percent in the first half compared to a
year earlier, well shy of the official goal of an 8 percent rise. Expenditures
were ahead of target and set to surge in the second half on the back of
infrastructure projects.
Tax intakes are, of course, closely tied to economic activity, so China's
upturn should deliver cash to government coffers. But improvement in June came
mainly from land sales, a one-off revenue source that masks the difficult road
ahead.
"Even when we are already factoring in relatively optimistic revenue
growth due to the economic recovery, the deficit is quite sticky at around 5
percent per year for the next three years," said Isaac Meng, economist at BNP
Paribas in Beijing.
But the real worry is the thickening morass of indirect debt.
Officials at the Ministry of Finance estimated earlier this year that
local government debt already topped 4 trillion yuan, or 16.5 percent of GDP,
much more than previously assumed.
Most troublesome of all is the potential for a "debt bomb," in the words
of China's Economic Observer newspaper, at lower levels of government as
officials engage in financial engineering that is both opaque and highly
leveraged.
Rules prevent Chinese banks from lending to governments the equity
capital which they need to obtain further loans for investment. But local
officials and banks are now exploiting a vast loophole thanks to intermediaries
known as trust companies.
The process is simple enough. Trusts create specially designed "wealth
products," which banks sell to their clients. Banks then give the funds to the
trusts and they, in turn, funnel them to governments as equity capital.
Local authorities, in short, are piling debt on top of debt. The Chinese
banking regulator has started to warn trusts and banks of the growing risks,
state media recently reported.
