Fixing China's debt burden will bring pain before it brings relief
Lim Say Boon says while China's debt problems are nowhere near crisis levels, they must be tackled sooner rather than later or they will continue to sap the economy of the vitality it needs to transform
Damned if they do, damned if they don't: Chinese policymakers are in a corner over the country's debt problems. Even with local government debt in the mix, China's total government debt remains moderate and manageable. But it won't stay that way if the credit binge of the past six years continues for even a few more years.
Central government debt is, of course, modest at around 25 per cent of gross domestic product. But that figure has been kept low through Beijing "outsourcing" the financial burden of fiscal stimulus to local governments, which have ratcheted up some 17.9 trillion yuan (HK$22.6 trillion) in debt, according to official estimates. Assuming that the responsibility for local government debt eventually ends up with Beijing, the government debt-to-GDP ratio rises to about 60 per cent.
That figure is still low compared with the figure of about 80 per cent for Germany, which is generally regarded as fiscally prudent, and the figure of around 100 per cent for the US. Never mind Japan, where the ratio is over 200 per cent.
The good news is that the central government can take responsibility for local government debt without too much fuss. It can issue central government paper to take out the non-performing loans at the local government level. And that might actually help advance the renminbi's evolution towards reserve currency status. After all, one of the requirements for a reserve currency is that the government has to issue debt for other central banks to buy.
The bad news is that the Chinese government seems in no hurry to clean up local government non-performing loans.
Perhaps the problem here is not the threat of a crisis but the absence of one, which means there's no urgency to deal with the issue. The mechanisms for dealing with these non-performing loans have been established since the 1990s - from the Resolution Trust Corporation in the US, to Malaysia's Danaharta and the Indonesian Bank Restructuring Agency. But it is worth noting that all these asset management companies were established when systemic crises were clear and present.