China ignores at its own peril its hidden debt risks
Zhang Monan says with up to 90 per cent of its assets illiquid, Beijing runs risk of a debt default
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.
The current problems are rooted in the government's response to the 2008 global financial crisis. The first round of fiscal stimulus, supported by credit easing, led local governments and the financial sector to increase their leverage ratios. As a result, by 2010, China's overall leverage ratio had risen by 30 per cent.
By the end of 2010, local-government debt totalled 10.7 trillion yuan (HK$13 trillion), with only 54 of more than 2,500 county governments debt-free.
China's Treasury-bond debt stood at 7.2 trillion yuan at the end of 2011, and its ratio of foreign debt to foreign-exchange reserves reached 21.8 per cent, well below the widely recognised danger threshold of 100 per cent. Likewise, while China's debt-to-GDP ratio is rising, it remains within the "safe" boundary of 60 per cent.
Judging from its balance sheet, then, the Chinese government seems to be in a solid position to manage its liabilities. Indeed, according to the Chinese Academy of Social Sciences, China's sovereign net assets increased every year from 2000 to 2010, reaching 69.6 trillion yuan - enough to cover the government's obligations.
