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China's debt/GDP ratio of 20-30% isn't as attractive as it looks, writes Patrick Chovanec. Toss...

China'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."
Comments (38)
  • Don't agree with that at all.


    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.
    18 Dec 2011, 10:35 AM Reply Like
  • It's just amazing to me the same people that were so clear eyed when it comes to the real estate and financial bubble in the US, can't see the sequel in china...


    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.
    18 Dec 2011, 01:40 PM Reply Like
  • Agree with davidbdc.


    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.
    18 Dec 2011, 01:54 PM Reply Like
  • The US and Europe governments don't have ties to the general economy in the same way that China does. China's GDP-debt ratio is understated in the official numbers because they ignore all liabilities held by a) state-owned banks; b) huge, unprofitable state-owned enterprises; c) debts run by local investment vehicles. Not to mention the huge imbalance twoards basing future growth on projections on current figures (while 50% of GDP is in investment). These all add up to trillions of dollars in debt that will only be healed through taxpayer extraction.


    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.
    21 Dec 2011, 03:32 PM Reply Like
  • In the end, all obligations held by banks across the world have the potential to be "state owned". In China, this link is explicit, whereas in other places, the link is hidden until the need for government intervention also becomes explicit, a la Europe today, as well as that list of US banks you gave during 2008-2009. AIG is still government owned, and then there's the importance of Fannie, Freddie, and Sallie to the economy...


    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.
    22 Dec 2011, 02:54 PM Reply Like
  • "Pessimists put it at 200% or higher, Greek territory."


    Actually, Greek territory is far below 200% of GDP.
    18 Dec 2011, 11:35 AM Reply Like
  • China is not Greece. China has a future that includes growth and some derivative of capitalism.


    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.
    18 Dec 2011, 11:35 AM Reply Like
  • Depends. US economy looked real robust, but the growth was driven by consumer and real estate debt.


    Chinese growth figures are very high for even a developing country.
    18 Dec 2011, 03:45 PM Reply Like
  • China is enjoying what many consider "population bonus", where an abundance of young workers with limited social security obligations make the country ultra competitive. The Chinese government, with its lighting rod of central planning, invested a significant portion of the trade surplus to develop world-class infrastructure, further enhancing the country's competitiveness. This "growth engine" has been running for the past three decades, and will likely continue for the next 15-20 years. But this won't last forever as the population will age, and the country cannot afford to continuously expand its population as there simply isn't enough resources to feed everyone. The key question to ask is what next?
    18 Dec 2011, 11:08 PM Reply Like
  • Peter has it right. Debt/GDP is one thing, productive capacity another. Greece is a tourism economy. The US is a service economy. Japan and China are productive economies, and both can service higher debt loads.


    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.
    18 Dec 2011, 11:42 AM Reply Like
  • They can always sell Treasuries en masse.


    Or make their currency the strongest in the world.


    Oh, my! One might equal the other, might it not?!
    18 Dec 2011, 11:58 AM Reply Like
  • Another bubble head article on china, when will it stop. Any and every success is a bubble.
    18 Dec 2011, 12:07 PM Reply Like
  • Some interesting commentary by the author on Chinese income taxes. Basically only foreign workers and employees of foreign companies pay high taxes yet party officials, businessmen, and those associated with party business pay little or no tax as much of income is freebies, undeclared, etc. Corruption and politics dominate everywhere now.
    18 Dec 2011, 12:08 PM Reply Like
  • Interesting article in Telegraph, basically reinforcing the premise of this market current.

    18 Dec 2011, 08:19 PM Reply Like
  • I didn't realize the Kochs lived in China.
    18 Dec 2011, 12:21 PM Reply Like
  • This article is not worth reading.


    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.
    18 Dec 2011, 12:39 PM Reply Like
  • Yes but you are either a fool or a lier if you forget few things about these numbers that relate to China.


    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.
    18 Dec 2011, 02:03 PM Reply Like
  • China is run by people. People will tend to lie cheat and steal, along with all the other good things that people do. I think people tend to forget that China is full of people, and instead think it is some gigantic void from which all the troubles we can ever imagine spontaneously spring forth.


    BTW, you spelled "liar" wrong.
    18 Dec 2011, 02:22 PM Reply Like
  • If the US were to nationalize S&P 500 companies, you have to imagine that all other countries in the world would follow to protect their own interests. Under that scenario, S&P 500 companies would collectively lose half of their international sales, and probably half of their assets and more than half of their cash (dividends are paid in the US). And Congress would simply run these companies to the ground with healthcare and social security. Just look at GM, American Airlines, Chrysler, Delphi, United Airlines. Again, it isn't a simple picture.
    18 Dec 2011, 10:58 PM Reply Like
  • vtorch,


    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.
    21 Dec 2011, 03:32 PM Reply Like
  • Re: "...they might decide to move all foreign employees to hong kong...",


    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.
    21 Dec 2011, 04:43 PM Reply Like
  • andao, in certain industries supported by the Chinese governments, foreign executives effectively pay lower tax rate than in Hong Kong. And there are many ways in which foreign employees actually pay lower taxes than in Hong Kong. Just ask the partners at the Big 4 accounting firms.


    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.
    26 Dec 2011, 05:08 AM Reply Like
  • Again why isn't debt service to GDP in the discussion???
    18 Dec 2011, 01:29 PM Reply Like
  • Isn't that splitting hairs? The higher the debt, the higher the service. Japan not withstanding, but that even more proves the point of a productive society being able to shoulder more debt as service costs remain low.
    18 Dec 2011, 02:04 PM Reply Like
  • "The higher the debt, the higher the service."


    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?
    18 Dec 2011, 02:26 PM Reply Like
  • Well that's why I said "notwithstanding" Japan. That is a case of implicit belief in productive capacity being able to shoulder the service. They're paying, what, 1% on 200% of GDP? It's crazy, but nonetheless manageable. Ours is a case of belief in the utterly unfathomable possibility of US default. Yet I don't think anyone can sincerely argue US debt can be repaid or shouldered at this point. But it is what it is. The general rule is, the higher the debt, the higher the service. These are the exceptions, however.
    18 Dec 2011, 03:16 PM Reply Like
  • "Well that's why I said "notwithstanding" Japan."


    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.
    19 Dec 2011, 04:59 AM Reply Like
  • How reliable are the numbers?
    18 Dec 2011, 02:11 PM Reply Like
  • China does a poor job at allocating capital, check our residential real estate market and see who does a worse job.
    18 Dec 2011, 03:47 PM Reply Like
  • Everything is a bubble! Everything is a bubble! Everything is a bubble!




    My guess is we don't see another bubble until we stop thinking about bubbles.
    18 Dec 2011, 04:08 PM Reply Like
  • Mach, although I don't subscribe to the theory that everything is a bubble, there is some truth to the notion that we have inbred financial markets now. That is, millions of people have access to the same near instantaneous news. That tends to breed bubbles.
    18 Dec 2011, 04:14 PM Reply Like
  • This is the Mother of all Bubbles.


    When it bursts, it will dwarf all other bubbles before it.
    18 Dec 2011, 04:59 PM Reply Like
  • You're a bubble.
    18 Dec 2011, 05:31 PM Reply Like
  • HEY Professor, Dr Li Dao Kui says the Central Government (like Reaganism) saddles only partially funds its initiatives saddles provincial and local governments with the majority of the funding. In other words, the Cn government has loads of RMB.
    18 Dec 2011, 07:16 PM Reply Like
  • One slight observation - theoretically, the CN government can print an unlimited amount of RMB ...
    18 Dec 2011, 11:00 PM Reply Like
    18 Dec 2011, 07:32 PM Reply Like
  • To be compared with China's 200% debt/GDP, we should use USA's long-term debt (from this week's Barrons):
    —we have 350% debt-to-GDP and our unfunded liabilities are more than another 360% of GDP.
    18 Dec 2011, 09:26 PM Reply Like
  • It is all about the interest payment obligation and debt service ability. Sovereign countries will better off to choose to default when debt service reach about 30% of GDP. Latin American debt crisis (Brazil, Mexico, Argentina, etc.) in early 80s are examples.


    Low interest rate policy is not just to "stimulate" economy, it also keeps debt interest payment low.
    19 Dec 2011, 01:17 AM Reply Like
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