China ignores at its own peril its hidden debt risks

In the past 200 years, there have been more than 250 cases of sovereign-debt default, and 68 cases of domestic-debt default. None of these was an isolated incident. Indeed, such defaults have always triggered financial crises.

Since China's era of reform and opening up began, the country has experienced three instances of large-scale public-finance problems. In the late 1970s, it faced a debilitating fiscal deficit. In the 1990s, its corporate sector was plagued by "triangular debts" (when a manufacturer that has not been paid for its product is unable to pay its suppliers, which in turn struggle to pay their suppliers). Later that decade, financial institutions were burdened by bad debts generated by state-owned enterprises.

Now China is experiencing a fourth instance of elevated debt risk, this time characterised by high levels of accumulated local-government and corporate debt. China's national balance sheet, which boasts positive net assets, has garnered significant attention in recent years. But, to assess China's financial risk accurately, policymakers and economists must consider the risks that lie in the country's asset structure - and the liabilities that are not included on its balance sheet.