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China's debt/GDP ratio of 20-30% isn't as attractive as it looks, writes Patrick Chovanec. Toss...
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Sunday, December 18, 2011, 8:50 AM ETChina's debt/GDP ratio of 20-30% isn't as attractive as it looks, writes Patrick Chovanec. Toss in contingent liabilities for the banks, local governments, and things like the railway system, and even optimists put the number at 90%. Pessimists put it at 200% or higher, Greek territory. Remember, Irish government finances were the envy of the world until its real estate boom went bust. In any case, "China's fiscal resources are not as limitless as they seem."
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China doesn't have nearly the social obligations (entitlements) that Western countries do. And the idea that somehow their entire banking system is going to collapse is just as likely as the likelihood that Europes banking system or the USA's banking system is going to collapse.
And he totally ignores that politically China is functional (not passing judgement, just looking at results), lives within its means, and puts economic development and growth as its primary function.
Does China have problems - undoubtedly. But when one looks at the whole picture their fiscal situation is better than the USA or Western Europe.
Oh, and for people who think a eurozone bank collapse is as likely as an invasion from Mars, check out this video featuring Oliver Sarkozy as he discusses europe's 30 TRILLION euro bank wholesale funding market.
http://bit.ly/rtxJWl
There's a lot of truth in the headline, but it ignores the relative truth with America and Europe. If we had to nationalize banks due to a crisis stemming from Europe, more than likely debt-to-GDP will be so high that it will make these estimates of China look responsible. In China they will lose their surpluses, but here, we will lose our solvency.
Picture this if you will: add all of the US government's current obligations to all of Bank of America, Citibank, Wells Fargo, and Chase's loans, then add the obligations of the 50 largest companies in the US (but change their profit rates to 5% or less). This is what the Chinese government is on the book for, but are ignored in government indebtedness reports. I would bank on China's finances being much worse than that of the US.
In that sense, I think your singling out of China is incorrect, although I agree that the real debt-GDP number is much higher than the 30-40% quoted by the media.
Actually, Greek territory is far below 200% of GDP.
Greece has demonstrated minimal interest in the historically proven success of the implementation and execution of such measures.
To a large degree, economic growth is a great answer to debt issues.
Chinese growth figures are very high for even a developing country.
The US has the worst debt situation in the world: low production, high debt not from improvements but entitlements, and no political push to rein that in.
Or make their currency the strongest in the world.
Oh, my! One might equal the other, might it not?!
http://tgr.ph/sCz8Df
Public debt to GDP is the relevant statistics for sovereign debt situation. Using some IMF data:
China: 34%
USA: 94%
UK: 76%
Greece: 143%
External debt to GDP is another measure - total debt owed to non-residents. Using WEO data:
China: 5%
USA: 99%
UK: 400%
Greece: 174%
You should look at current account balance (CIA World Fact Book):
China: +US$305 billion
USA: -US$561 billion
UK: -US$40 billion
Greece: -US$17 billion
Add in the fact that China has one of the highest household savings rate (38%, compared to 4% in the US, and 7% in the UK), balance with almost non-existence social welfare (a probable reason for the high household savings) makes the picture more complicated.
In short, simply looking at debt-to-GDP is too simplistic and tells you absolutely nothing.
And the comment about driving people to Hong Kong is simply ignorant at best. In case it hasn't been noticed, China and Hong Kong do not have an open border system.
90 of the 100 largest companies are state owned. People that run these companies are political appointees. It is at heart still just an old fashioned communist system. It does a very poor job at allocating capital. As long as money keeps flowing into China it is all well, when it starts flowing out (and it will sooner or later) you will find just how much China really owes.
If US were to nationalize S&P 500 companies it would have a lot more cash. Can you imagine Obama administration appointing CEO of Apple, mmmm that would work so well....NOT.
BTW, you spelled "liar" wrong.
the comment about moving to hong kong is geared towards companies who have foreign employees in China. they might decide to move all foreign employees to hong kong if the taxes and welfare contributions become too high.
Unfeasible because the lodging and housing standard of living in Hong Kong is sky high. Land in Hong Kong is such a gem that a luxury apartment in the Central District recently was sold for US$50M as an extreme example. No way that those 'employees' you alluded to could afford the housing cost of Hong Kong.
Hong Kong is a very expensive city to live in, primarily due to the property tycoons having too much power (rental cost is at the very heart of the inflation problem and the puppet government isn't doing anything). In my opinion, Hong Kong is prospering because China allows it to, so China doesn't really care if it drives people to Hong Kong - because it can simply change Cinderella into a pauper with the wave of a wand.
My issue with the article is that it is too simplistic (or naive). It doesn't give issues their due considerations and makes conclusions without much analysis.
Not true. We are now in the same league as Japan, as far as refuting this statement.
And, why are servicing costs so low in Japan and America, especially when the aggregate numbers in America show a situation largely the same if not worse than Europe? Is it just because we are better, or is there a lot more to it than that?
I think you missed my point. My point is "notwithstanding Japan AND America".
" They're paying, what, 1% on 200% of GDP? It's crazy, but nonetheless manageable."
If Europe was paying 1% on their debt, their debt would also be easily manageable and they wouldn't be having a crisis. But they aren't. Exactly why they aren't, and why we and Japan are, is something of a mystery in my opinion.
Idiots.
My guess is we don't see another bubble until we stop thinking about bubbles.
When it bursts, it will dwarf all other bubbles before it.
—we have 350% debt-to-GDP and our unfunded liabilities are more than another 360% of GDP.
Low interest rate policy is not just to "stimulate" economy, it also keeps debt interest payment low.