China's debt problem

 
File photo: Money at a bank in China China's gross debt-to-GDP ratio is around 43%

China's new government has ordered a national audit of government borrowing and announced that it is adopting a budget deficit limit of 3% of GDP, similar to the Maastricht Treaty's guidelines for the eurozone. The first move is welcome, but has the latter gone down the wrong line?

China's government debt, especially local government debt, would benefit from greater transparency. In the last audit, local government debt came to 10.7 trillion yuan, or $1.8 trillion, which equates to about a quarter of GDP at the end of 2010.

And more debt has been accumulated since then. Also, it's unclear as to whether this really is the total amount since large portions are held off balance sheets in so-called local government financing vehicles.

Taken together with central government debt, China's gross debt-to-GDP ratio is around 43%, which isn't too bad considering that the average debt level for advanced economies in the US and Europe is over 80%. But there is a lot of doubt around these numbers and the estimates that I have been given by sources in the Finance Ministry are closer to 60%.

Also, it is often pointed out to me that the US only counts federal government debt and not state debt, so why wouldn't China follow suit? I'll come back to this point in a moment.

In any case, greater transparency is a welcome development, especially as the new government can do a bit of housecleaning as anxieties grow over China's ability to manage its debt.

US analogy

The deficit cap, though, may be more contentious. Such caps limit the counter-cyclical impact of government spending. In other words, in a recession, government spending on unemployment benefits rise. So, to keep within the 3% cap, other spending - like discretionary spending - will need to be cut.

Besides they don't seem to work very well. Capping the budget deficit at 3% of GDP is similar to what the eurozone has done. You may recall that it was broken first by the core countries of Germany and France soon after its adoption.

And though the deficit rule has been criticised in the euro area, it may make more sense in a single currency area, where different governments are attempting to straitjacket fiscal policy with shared monetary policy.

But coming back to that point, the closer analogy for China is the US.

Chinese provinces are more like US states in that there is a federal structure for revenues and spending rather than separate national entities like the euro area.

If China is worried about local government debt, it may be more pertinent to consider balanced budget restrictions. Three-quarters of US states aren't allowed to run a deficit.

Balanced budget amendments don't always work well in the US, but they came about after a century or so of America attempting to control state debt.

Just restricting the overall fiscal deficit doesn't quite address the problem.

 
Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this
    0

    Comment number 121.

    China continues to dangerously overplay a weak hand.In Africa, elsewhere it's guilty of the same kind of imperial exploitation using local dictatorships as its agents as was used against it in the 19th century by Europe.Its territorial aggression would become comparable to Japan's in the 1930s left unchallenged and unchecked by the US.China has not learned from history playing a game it can't win.

  • rate this
    0

    Comment number 120.

    Instilling notions from an early age that are unspoken fences confining the free range of ideas because they're politically dangerous, taboos that are the chains on mental exploration because they carry consequences also chain the mind to explore and solve technical problems that lead to new scientific and engineering breakthroughs.China can't have it both ways.As it is, it will remain a laggard

  • rate this
    0

    Comment number 119.

    That China would stoop so low to attack this web site and probably block access to it to Chinese citizens proves how weak and frightened its government really is.The Chinese government knows the facts and knows the long term outlook is bleak.And just when it was becoming apparent China's government was placed in the hands of inexperienced beginners.An ominous portent of future problems.

  • rate this
    -3

    Comment number 118.

    B: 0.7% omg, almost stops growing
    R: 3.4% just okay, still livable
    I : 6.5% almost there, more effort
    C: 7.5% everyone is looking at you
    S: 2.5% hmm, no comment
    US: 2.2% looks normal in decades
    EU: -0.3% pack your bags, folks!

  • rate this
    -4

    Comment number 117.

    Amazing thing is so many economists have such narrow focus on a limited number and type of recent growth data alone that tunneled vision blinds them to the larger reality that must arrive at least at the possibility that China's growth rate is unsustainable.It's far more than likely, it's virtually certain.Normal accounting and management practice in China would frighten any investor in the West

  • rate this
    +7

    Comment number 116.

    Totally agree with # 111.
    The article is a travesty. It implies China's economy is run along the same lines as Western economies, which is plainly wrong.
    It then goes on to say that Chinese provinces are like US States : I do not think I have ever heard such nonsense from the BBC---it wouldn't have been allowed on the 6 O'clock News would it ? So why here ? Poor reporting lowers the whole BBC ..

  • rate this
    0

    Comment number 115.

    Each nation must live within their means . No country can be ruled on loans without time limit .

    No is the time of belt fastening - austerity for many countries .

  • Comment number 114.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    -2

    Comment number 113.

    The amazing thing in this is Chinas complete acceptance of right-wing neo-liberal economics, notable for its inability to understand the economic differences between for currency issuing & non currency issuing States, ultimately why the Eurozone got in such a mess.
    The US is somewhat schizophrenic on this, being staunchly Neo-liberal on everything but monetary policy to Republican fury

  • Comment number 112.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +8

    Comment number 111.

    My last post deleted because I dared to agree with earlier posters who said what a poor article this is from a poor correspondent. Can't crriticise the BBC's worst correspondent now? Ms Yueh's many Blogs ALWAYS get a lot of negative comment on her articles. And , as Business Correspondent, she seems more like China correspondent ! To liken Chinese provinces to US States is incredibly absurd !!

  • Comment number 110.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    0

    Comment number 109.

    108 Any nation that attacks the US with WMDs is committing national suicide and knows it.That's why it won't likely happen. It's not the same for terrorists like al Qaeda.They are transnational, have no territory or population at risk and have no value for human life including their own.They're as much threat to attack China and Russia as to attack the US.China and Russia seem too blind to see it.

  • rate this
    -1

    Comment number 108.

    sieu @106
    "satisfaction
    if US perishes
    by our own hands"?

    Maybe, if nuclear exchange in 'our' lifetimes, or Earth caught unready, too busy squabbling to meet environ or planetesimal threat

    Perishing in mind was of bequest to children. Potentially a paradise, for evolution & galactic exploration, for millions even billions more years. Or of fate to be tempted, profit suicidal in a century or two?

  • rate this
    0

    Comment number 107.

    China has deliberately engineered a psychological war with Japan and is trying to intimidate other neighbors.How happy many Philippines were to see the US leave Subic Bay, now wish they'd return.South Korea and Japan see the US as the only power able to stop China's territorial aggression.

    http://www.bbc.co.uk/news/world-asia-china-23499239

    China played a dangerous game in Iraq, now Iran

  • rate this
    0

    Comment number 106.

    105 If US perishes we'll have satisfaction of knowing it was by our own hands, not those of some unaccountable despot like those in Brussels, Beijing, or one who was elected in Egypt now being held captive.Our Prisoner President and Captive Congress are the servants of the voters and they know it.We have the power to impeach or recall them at will if they misbehave.It happens...here, not in China.

  • rate this
    0

    Comment number 105.

    sieuarlu @103
    "expect the US to do?"
    (about itself, its people, its 'partners')
    What "US"?

    Do you mean the prisoner president, or the captive congress, or the poverty-stricken people (even the richest enslaved by fear and greed), or the people who once were thought of as "created equal", two centuries ago with freedoms equal and inalienable, today traded, led by the nose, to awaken or perish?

  • rate this
    0

    Comment number 104.

    It is hard to tell if this web page is experiencing technical difficulties due to BBC software or hardware problems which while less frequent than in the past still are not unknown, or because this page is under attack by the Chinese Communist Cyber Warfare Department. That would come as no surprise to anyone aware that China will not tolerate criticism of its very troubled society.

  • rate this
    0

    Comment number 103.

    102 Need for equality? What do you expect the US to do, descend to the level of China and others?If China wants equality, it must act as an equal.The first thing that must go is the tyranny of the Communist Party replaced by free and fair democratic elections with a real constitution like the US's and rule of law, certainly not the sham Egypt suffered. China is a paper tiger, will never equal US.

  • rate this
    0

    Comment number 102.

    sieuarlu@98
    "no equality"
    Point missed

    Need of "equality" (not absurdly in all dimensions but in equal partnership) has first to be appreciated 'at home' - for marriage 'to work', for business 'to work', for the US 'to work' (or for EU or China or other first awake) - THEN naturally across the world: QED

    No triumph for "US" current HQ of Mammon, used again just as others: 'no longer useful, bye'

 

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