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Government debt in China is worse than the headline numbers suggest [ClearOnMoney]
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Government debt in China is worse than the headline numbers suggest

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Commentary

Government debt in China is worse than the headline numbers suggest

23 Jan 2014 by Jim Fickett.

One often reads that the Chinese government, despite rapidly rising debt, still has plenty of room to maneuver. Here is a typical passage, from Forbes, giving a standard argument that even the combination of local and central government debt is low compared to many advanced economies:

Because the central government is ultimately responsible for all local-level debts in China, local debt must be added to central government debt to come up with a total government debt/GDP ratio. Andy Rothman, China Macro Strategist for CLSA, puts this ratio at 53.5 percent for 2012 – up from 43.5 percent in 2010, 44.1 percent in 2009, and 32.9 percent in 2005. Compared to the United States and most developed European countries where government debt levels are near 100 percent of GDP, China’s government debt/GDP ratio is not exceptionally high. For this reason, as well as the fact that China’s economic growth rate, while slowing, remains significantly faster than most of the rest of the world, Andy concludes that China’s total government debt is high but manageable in the near term.

But in China not only the local governments, but also many of the largest financial institutions and companies are really arms of the government. And if one includes the debt of these so-called state-owned enterprises, total debt begins to look much more worrisome. From a recent article in the Financial Times written by David Pilling, a very insightful expert on China:

Much attention has been paid to local government debt, much of it off balance sheet. But corporate borrowing may turn out to be a bigger problem. According to the Chinese Academy of Social Sciences, if state-owned enterprise borrowing is included, total government obligations rise to 151 per cent of GDP

It is a general rule of the investing world that whenever you see high growth, most investors will attribute the growth to solid, long-term trends, while, in reality, it is very often driven by a rapid increase in debt.