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China facing a hidden debt crisis

posted 2 Feb 2011, 05:15 by Sam Mbale   [ updated 2 Feb 2011, 05:17 ]
Leading Chinese lawmaker Yin Zhongqin warns China is facing a potential debt crisis if local governments continue to over-invest.
ASIA-BUSINESSASIA - China's massive stimulus package helped the country through the global economic downturn. But now, it's leaving Beijing with a hidden debt crisis.

Earlier, I spoke to Yin Zhongqin, a prominent Chinese lawmaker and asked him just how indebted local governments really are.

National People's Congress Finance Committee Deputy Director Yin Zhongqin saying:

"The most conservative estimate to-date is we have more than 10,000 investment in financing platforms and loans from these platforms have exceeded CNY10 trillion. It's quite a big amount of debt. First, it's growing very fast and second, a lot of these investment and financing platforms have sprung up with accounting levels, not in the better managed provincial level like in the past. So this is the main danger. 17% of the loans from these investment and financing platforms in 2009 and 2010 were generated at the accounting level where governments don't have many assets and some cannot even afford to pay their staff. That's accumulated from these platforms even with government financial guarantees simply can't be paid back. In other words, when they borrowed the money, local governments did not plan to pay it back. So who's going to pay the bill? First of all, banks; because the money was loaned by banks. But in the end, it all ends up in the central government's fiscal budget. Local governments' debt problems will come to light in 2011."

Yin said the extent of the debt is not obvious yet.

National People's Congress Finance Committee Deputy Director Yin Zhongqin saying:

"Banks say their bad loan ratio is very low; that's because compared with the amount of money in the pool, it does not seem very big. But note that lots of projects haven't really started yet. And they do not have to pay back the loans until the projects are finished and the debt is settled. Therefore, I think a large amount of debt that local governments took on since the end of 2008, to battle the impact of the global financial crisis, will become a heavy burden for our development going forward. Central government debt is also very serious. In 2009, we had CNY950 billion in debt. In 2010, the number was CNY1,050 billion. So that is an additional CNY2 trillion in just two years. Lots of projects are still underway this year and we can't stop them. So the scale of debt will continue to be quite big this year probably nearly CNY1 trillion. It is very dangerous for China."

I also asked Yin the impact on bank's non-performing loan ratio.

National People's Congress Finance Committee Deputy Director Yin Zhongqin saying:

"Although they're called non-performing loans and even bad loans for banks, they have not shown up on the books yet. But it doesn't mean that they don't exist only because their problem hasn't exploded yet.

The European debt crisis is a wake-up call for us. Some scholars have already pointed that out but government bodies have not paid enough attention. They seem to think that the debt crisis only happened in Europe and we in China could not have the same problem. Some government departments reported that even though we have a deficit of CNY1 trillion, the deficit to GDP ratio is only 2.2%, lower than the European Union benchmark of 3%. Our debt-to-GDP ratio is also lower than 20% which was good but I think this is a superficial calculation. Why? Because when China estimates its deficit ratio, only the central government debt maybe recorded the deficit. Local governments cannot do that. So local government deficits are hidden and can't be estimated.

Moreover, debt from local government is only counted if it is approved by the central government as government debt. Beijing must cool down local governments' investment spree before it's too late, Yin said. The foremost thing for 2011 is to restrain local government investment.

First of all, the GDP target should not be set too high. The central government is trying to suppress overshooting GDP growth to leave more room for structural adjustment. But local governments are trying hard to overshoot the targets.

We recently did a study of development growth targets locally and found out that only five provinces set their GDP growth target lower than 10%. All the other provinces and cities set targets higher than 10%. Five or six provinces even doubled their GDP targets.

And what is behind GDP growth? Investment. I think we should restrain GDP growth for the sake of development. We should emphasize that we don't want GDP for GDP's sake because GDP growth is the main factor in an official's promotions. Officials create the numbers and the numbers create the officials. Local governments' investment sprees will also reflect the leadership transition. County officials will rotate, beginning at the latter half of this year and provincial governments will rotate later this year into next year.

From late 2012 into 2013, the central government leadership will change. Under these circumstances, lots of officials will cling to GDP growth as their most important target. So we need to use macro controls to pull it back and lower it to reasonable level."