By: Benjamin Carlson
December 10, 2013
Provincial governments have been spending like mad, all on borrowed money.
China is amassing debt at a blistering pace.
Since June of last year, more than 10 provinces and cities in China have loaded up on fresh stimulus plans that total up to 20 trillion yuan ($3.3 trillion), according to a recent report by the Chinese newspaper First Financial Daily.
Even in China, where everything is bigger, that figure is huge.
To compare, it’s roughly five times the amount the government pumped into China’s economy to stave off the global financial crisis in 2008-2010.
Worse yet, it’s a mountain on top of a mountain.
In September, people were shocked when a government researcher estimated that local debts totaled $3.3 trillion at the end of 2012 — double the 2010 figure.
Now, if First Financial Daily’s numbers are correct, debts have basically doubled — yet again.
No wonder that yields on Chinese public debt — meaning the price governments pay to borrow — have soared to their highest levels in almost nine years.
According to the report, Sichuan is rolling out 4.76 trillion yuan of new spending, roughly 180 percent of the southwestern province’s total annual output. Coastal Fujian, a well-off province traditionally known for tea, is going in for 3.95 trillion yuan. Guangdong, an export-dependent wealthy southern province, will drop 1.41 trillion yuan.
The huge figures call attention to the problems the central government faces trying to wean local governments off using risky debt infusions to jack up GDP.
This was a core issue at November’s Third Plenum, a major meeting of Communist Party officials. They agreed on a few reforms, though the details are still hazy.
One idea is to change the way Party leaders are evaluated, so that GDP growth isn’t the end-all-be-all of every politico’s career. Another is to create new streams of local tax revenue. Another is to let governments issue bonds, instead of turning to shady shadow financing for loans.
None of it seems like a silver bullet, but Beijing still sounds optimistic.
Last Wednesday, Yang Weimin, vice head of the Office of the Central Leading Group on Finance and Economic Affairs, said that the amount of local debt is risky but “under control.”
This echoes the view put forward in September by Premier Li Keqiang — the man most responsible for China’s economic policy — that debt-fueled spending is at “safe levels” in China.
China’s addiction to stimulus became a danger only somewhat recently.
For most of the last three decades, the formula worked: Local governments borrowed money; they spent it building airports, highways, and apartment complexes. The economy grew and they paid back the loans.
Starting in 2008, however, China went on a binge of debt-fueled spending that produced some misguided projects — think Olympic-sized stadiums in third-tier cities. That yielded a wildly increased debt-to-GDP ratio.
From 2005 to 2012, IMF data show, the total volume of debt in China’s non-banking sectors soared from 25.8 trillion yuan to 91.6 trillion yuan, or 14.7 trillion dollars.
Debt in China amounted to 182 percent of GDP at the end of 2012, up from 167 percent the year before, according to an analysis of local government data. By comparison, the US debt-to-GDP ratio is now 73 percent, according to the Congressional Budget Office, twice the percentage it was in 2007.
As China’s economy has started to slow, that lopsided ratio has become more and more of a concern.
“China has the highest investment-to-GDP ratio in the world — a downturn in its investment cycle would not only adversely affect its economy but also those of others, and global commodities prices,” Standard & Poor’s said in a February report.
Not to mention that debt growth is not confined to the government. Bad loans have also proliferated in the corporate sector.
In August, Rongsheng, a major shipbuilder, asked the government for a bailout to help pay off more than $4 billion in outstanding debt. In the first half of this year, China’s big banks had to write off three times the amount of bad loans compared to the year before.
None of this means that China is on the verge of financial collapse, however.
As GlobalPost has previously explained, because Beijing controls the big banks and strictly limits how much cash can be taken out of the country, the system can malfunction without leading to a meltdown like the Lehman Brothers crash.
Under China’s Communist system, non-performing loans can stumble on almost indefinitely.
“The money always ends up in some entity controlled by the government,” China economic expert Victor Shih told GlobalPost. “This is why it’s been very sustainable.”
Gold Goliath is not your typical gold dealer.