Wednesday, November 11, 2009
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. If Cpolers remember a conversation about the rise of deficit this year in China, which put official debt this year at a modest 25% of GDP. However, the reason growth is so high this year is due mainly to investment. In addition to the 4 trln RMB central government package, local governments also rolled out additional trillions in investment projects. In OECD countries, much of these projects will be financed through the official budget, but in China, local governments set up urban development companies to raise this money as “corporate loans” from banks. Thus, around 70-80% of this trillions in investment was financed through bank loans.
More will have to be spent to finance these projects. Local governments learned long ago (possibly in the 50s) that when the central government is feeling generous, start as many projects as possible as oppose to spend money to complete projects. This is because they know that the central government will retrench one day, but the center is still reluctant to cut off funding from on-going projects, which result in total loss. On this basis, Nomura Securities, typically a very bullish outfit, estimates that new lending will again have to be 10 trln RMB for both 2010 and 2011 to fully finance existing construction projects. This means local governments will need to get into trillions more in debt (probably 10 trln in addition to what ever the current amount is).
Does this mean a collapse? certainly not necessarily as the government holds a lot of assets. However, as with any country, we should also pay attention to the liabilities.
On a related subject, while there have been at least a handful of runs on local bank branches in the 1990s, one has not read of any in the Chinese press in the past 5 years or so. The last I can recall, and my memory may be faulty, was 2003.
Surely, the Chinese public, who believe 中央絕對不會讓它倒 don't ascribe to the possibility of collapse. In itself, this mitigates against panic.
Rich Kuslan, Editor