China: Us, a debt problem? What debt problem?
posted at 8:11 pm on August 28, 2013 by Erika Johnsen
China has a debt problem, and whether they like it or not, it’s going to increasingly make itself felt in their economy pretty quickly here, via the WSJ:
As worries over China’s debt problem mount, the burden of paying off those loans could be the trigger that tips runaway credit into slower economic growth and financial stress. …
Nationwide, four-and-a-half years of breakneck growth in lending has significantly increased China’s debt burden. Outstanding borrowing by businesses and households rose to 170% of gross domestic product at the end of 2012 from 117% in 2008, according to data from the Bank for International Settlements. The 2012 figure for the U.S. was 157%.
Assuming interest rates of 6.9% on outstanding credit—the average in June—and repayment over the next decade, interest and principal payments on business and household debt currently absorb around a third of China’s GDP. At the end of 2007, on the eve of the financial crisis, the equivalent debt-service ratio for the U.S. was 21%, a figure that was broadly unchanged at the end of 2012, according to the BIS. …
The heavy debt load could also weigh on China’s efforts to tilt its economy away from heavy spending on infrastructure, often paid for with borrowed money, and towards a rise in consumption.
The WSJ piece has a lot of good info, and check out this useful series of visuals from the Financial Times:
Lucky for China, then, that they maintain such strict oversight over the media and Internet access for moments exactly like this, because keeping a lockdown on negative reports of how they’re running the country is a matter of communist-party policy. For instance, here’s an editorial from their flagship newspaper earlier this week (h/t ViaMeadia):
China is not likely to fall into a local government debt crisis as local debts were invested mainly in construction projects, according to a commentary in Monday’s People’s Daily, the flagship newspaper of the Communist Party of China.
The commentary noted that many countries hit by the debt crisis used their debts for paying civil servant salaries, pensions and other expenditures, and the money was used without producing further economic benefit.
In contrast, China’s local government debt was primarily used for construction projects, such as the construction of railways, expressways and water facilities. The debts eventually became government assets, the paper said. …
The paper thus ruled out the possibility of a local debt crisis in China.
Er… either something was lost in translation there, or that doesn’t actually make sense — and I’m leaning towards the nonsensical explanation, because that meshes pretty darn well with the Chinese regime’s strategy with just about everything that doesn’t go their way: Deny, deny, deny.