A number of prominent Chinese financial analysts have, in recent days, voiced renewed concern over the scale of local government debt in China, even as credit rating agencies have expressed fresh doubts about the government’s ability to tackle the problem.
This week, ratings agency Moody’s cut China’s credit outlook from positive to stable, warning that “more reform would be necessary to prevent a buildup of pressures that could increase the risks of a hard landing for the Chinese economy.”
“Progress has been less than anticipated in the process of both reducing latent risks by making local government contingent liabilities more transparent, and in reining in rapid credit growth,” said a report from Moody’s Investors Service. Their warning followed a recent move by ratings agency Fitch to cut China’s currency credit rating, for the first time in more than a decade, from AA- to A+.
The agencies’ concerns have also been reflected in recent comments by several prominent Chinese financial analysts, who have expressed alarm over the continuing growth in local government debt, which has expanded rapidly in the wake of the government’s response to the 2008 financial crisis.
The Chinese government unveiled a 4 trillion yuan ($645 billion) stimulus plan in the aftermath of the global financial crisis, and also put in place loosening measures that funded massive infrastructure projects. While the moves helped China weather the recession and prevent any major losses of jobs, local government debt subsequently ballooned. According to the National Audit Office, local government debt had reached 10.7 trillion yuan ($1.73 trillion) at the end of 2010.
The figure will exceed 16.3 trillion yuan ($2.63 trillion) this year and reach a level equivalent to 29 per cent of the country’s GDP, according to a study released last month by Huatai Securities, a prominent Chinese securities broker.
Last month, the banking regulator put forward new measures to restrict lending from rural banks, particularly to property development projects.
The level of debt was “worrying not only because of its size”, but because “it is not transparent”, the Caixin magazine said in an editorial on Wednesday. “Particularly of concern,” the editorial said, “is the tendency of Chinese officials to let political expediency override economic sense.”
The issue was the subject of a heated debate at the recently concluded Boao Forum, an annual government-backed economic summit, billed as “China’s Davos”, where the debt problem was described by participants “alarming”.
“China’s local government debt, which expands in the form of shadow banking, is a negative, alarming phenomenon,” said Hu Shuli, the head of Caixin, who called for “a third-party independent institution be introduced to assess local governments’ capacity to service debts”, in a report in the official China Daily.
Hu Zuliu, head of the China-based Primavera Capital Group investment firm, went as far as saying China would be “the next victim” of a credit crisis with its debt problem “more complex” than faced elsewhere. His comments were echoed this week by Zhang Ke, the Vice President of China’s accounting association, who told the Financial Times the debt problem was “out of control”.
“A crisis is possible,” he said. “But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”
Chinese officials have, however, rejected such descriptions of the problem as alarmist, and stressed that the debt issue could be managed considering that the debt-to-GDP ratio was lower than in many countries. Xiang Huaicheng, the former finance minister, said at Boao that the debt level had not reached a critical stage, and that most of the debts were “internal” and could be serviced considering the government’s sizeable reserves.
The Caixin editorial, however, warned that with the slowing economy, which registered a less than expected 7.7 per cent growth in the first quarter, and easing fiscal revenues, the government might find it increasingly difficult “to bear the burden of debt in case of a systemic meltdown”.
“The debt will instead be monetised, and the people will have to foot the bill,” Caixin said.
“This is China’s own sub-prime mortgage crisis in the making.”
The level of
debt was “worrying not only because
of its size”,
“it is not transparent.”