China Debt Burden Crisis Unlikely
Amid warnings that China may face a financial crisis induced by its debt burden, an economic expert said this week that a number of factors make this scenario unlikely.
“Economists have often used such adjectives as ‘neck breaking’ and ‘breath-taking’ to describe the very fast economic growth of China in the 1980’s and 1990’s,” said Li Yuefen, special adviser on economics and development finance at the Geneva-based South Center, adding that the same 2 words were borrowed to describe the Chinese debt burden.
Due to China’s rapid structural transition from a trade and investment dominated economy to one based on domestic consumption and services, and the spillover of the global financial crisis, China has suffered an increase of debt-to-GDP ratio.
In spite of rising corporate and local government debt, Li said that the fundamentals of China’s financial system remain solid, with no crisis seen.
“The central government debt is lower than many developing and developed countries. External debt is low. Even though trade surplus has been shrinking, current account surplus is still healthy,” she explained.
“The corporate and local government debt are predominantly domestic. Therefore, the probability of a currency crisis is very low. If needed, the central government is in a position to stimulate the economy by increasing central government debt,” added Li.
The expert said that China also boasts ample foreign reserves, which is among the highest in the world.
China’s economy has also been propped up by a financial system where the state plays an important role, and the unique model would increase creditors’ confidence and lessen uncertainties, Li said.
“A look at the asset and liability position shows that, barring seismic global financial volatility, a debt crisis is unlikely in the short term,” Li noted, explaining that “the asset and liability positions at the central government and household levels are healthy. The corporate sector and local governments’ debt are at manageable levels.”
China’s deficit also remains low, standing at around 3% of the GDP, giving Beijing more spaces to deal with corporate debt if needed, Li added.
Li suggested that China should slow down credit expansion while enhancing investment quality, and carrying out reforms in state-owned enterprises and local-level taxation.
Maintaining economic growth, strengthening deposit insurance and continuing the current deleveraging measures are also crucial to maintaining control of China’s fiscal situation, she said.
By Tian Shaohui
Paul Ebeling, Editor