Editor’s note: This article was first published in August 2011. The debt ratios (China’s declared 17%, US 87%, UK 80%, Japan 210%) and the estimates from Gavekal-Dragonomics, other analysts and Fitch are from that time.
Immediately after Standard & Poor’s announced its downgrade of US debt, China wasted no time in sending a message that basically said: “A country must live within its means.” It has the power to send that message as the largest holder of US debt.
The Chinese government has declared gross debt of only 17% of GDP, very low compared with the US (87%), the United Kingdom (80%) and Japan (210%). S&P and Moody’s upgraded China’s debt rating in 2010, citing its strong external asset position, its economic growth (around 15% a year) and a very optimistic outlook as an emerging country.
But the Chinese government may not have been fully transparent, nor quite the model of austerity it seems in times of global economic crisis. According to CNBC, when a rating agency assesses a country’s debt, it uses a single concept known as “general government“. This includes the liabilities of the central government as well as social security funds, and it was precisely on this single “test” that the decision to downgrade the United States was based.
In the wake of the 2008 crisis, local and regional governments threw themselves into construction, setting off down the same speculative path whose consequences we (in Spain) have not yet finished paying for. China took on large debts channeled through “special purpose” financial vehicles. These vehicles make it possible to get around the laws that require local governments to keep balanced budgets.
Efforts are now under way to estimate the total (real) size of China’s local and regional debt, and the firm Gavekal-Dragonomics already puts local debt alone at 37%. After analyzing the debt of the ministries, the bonds issued by banks on the government’s behalf and the bad debts of the Chinese banking system (which is practically state-run), Gavekal-Dragonomics estimates that China’s real debt could be as high as 90% of GDP.
Other analysts think it could be 70–80%, and Fitch Ratings gives a more conservative estimate of 48%. What is completely ruled out is that it is 17%. This raises fresh concerns about the “lens” through which rating agencies analyze debt, putting the agencies back in the eye of the storm.
These figures could be seen as very damaging to China’s image, although many analysts believe that, despite its real debt, China is unlikely to end up like Greece or Portugal.
Some take the opportunity to remind China that where they are now, we have already been, and where we are now, they could end up if they keep focusing on property speculation.
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