We all hear about how bad Greece?s national debt is. We hear about how the rest of the PIIGS countries are threatening to derail the Euro. Then there?s Japan, followed by UK. Also, most of the US states are like mini-Greece (see Inside the Dire Financial State of the States). Worse still, the US Federal Government itself is projected to face bankruptcy. You can see the who?s who list of potentially bankrupt major governments in our previous article- Next phase of GFC is when governments go bust.
But no one looks at China. Since it is the world?s greatest creditor nation, surely its fiscal position must be solid right?
No!
Firstly, China?s US$2.4 trillion of reserves must not be mistaken as ?cash at bank? to be spent (see Is China allowed to use its US$2.4 trillion reserve to spend its way out of any potential crisis?).
Secondly, many Chinese local government are heavily indebted too. According to Liu Jiayi, the head of China’s National Audit Office, some Chinese provinces have serious debt problems. As this news article reported,
Mr Liu said the ratio of debt to disposable revenues at some local governments was over 100pc and in the highest case it was 365pc.
He said the audited debts of 18 of China’s 22 provinces, together with 16 cities and 36 counties amounted to 2.79 trillion yuan (?279bn) in 2009.
Several observers believe the situation is far worse. The China Daily newspaper, which is run by the government, suggested that the total sum could add up to between 6 trillion and 11 trillion yuan (?590bn-?1.08 trillion).
Victor Shih, a professor at Northwestern University in the United States, believes the sum in 2009 was 11.4 trillion yuan, equivalent to 71pc of China’s nominal GDP.
Mr Shih has warned that local governments have also succeeded in rapidly funnelling large amounts of debt off their balance sheet and into public-private investment vehicles.
Mr Shih forecasted that by next year, China?s government debt will hit 96 percent of GDP as ?infrastructure projects continue to eat up cash and produce negligible returns.? According to him,
The worst case is a pretty large-scale financial crisis around 2012. The slowdown would last two years and maybe longer.
The good news is that the Chinese government is doing something about it today. But we doubt it will be painless. Fingers crossed on that one.
