The Chinese government still has ample policy
space to deal with the country's debt problems
BEIJING, July 22,
2024 /PRNewswire/ -- A news report
from chinadaily.com.cn:
The scale of China's debt and its ratio to GDP have increased
rapidly over the past decade. According to the Bank for
International Settlements, the combined debt of Chinese
enterprises, government and households reached 363 trillion yuan ($50.13
trillion) as of 2023, with a debt-to-GDP ratio of 288
percent. Over 98 percent of this debt is from domestic
stakeholders, with foreign debt standing at a tiny proportion. It
has become a top concern among policymakers and the academia how to
view this rapidly rising debt and what response should be rolled
out.
Over the past 20 years, the main debtors and the purposes of
debt in China have undergone
significant changes, a period that can be roughly divided into
three stages.
The first stage was from 2004 to 2011, when China was at the
peak of its industrialization, characterized by the rapid
development of capital-intensive industries such as steel,
chemicals, energy and equipment manufacturing. Capital-intensive
industrial enterprises were the main debtors during this period,
with limited borrowing by the government and households.
The second stage was from 2012 to 2019. After China's
industrialization peaked, capital-intensive enterprises no longer
borrowed heavily, and local government financing platforms and
households became the main sources of new debts. Local government
financing platforms mainly borrowed for infrastructure investment,
but not primarily for electricity, heating and public
transportation projects. Instead, a large amount of the borrowing
was invested in urban public facilities such as underground
pipelines, urban greening and environmental protection,
significantly changing the urban landscape in China. During this period, households also
began to borrow a large amount of debt, mainly for home purchases.
Some also borrowed for spending purposes.
The third stage has been from 2019 onwards. Under policies to
rein in the hidden debts of local governments, the scale of
borrowing by local government financing platforms dropped. China
has adopted more government special bonds and treasury bonds to
replace previous borrowing by local government financing platforms
from commercial financial institutions, thus reducing debt interest
costs and extending debt maturity structures. Meanwhile, household
mortgages have dropped as a result of major changes in China's real
estate sector. But China's policymakers have emphasized strongly
the importance of creating a more favorable credit environment for
small and micro enterprises, green finance and the manufacturing
sector, leading to faster credit growth in these sectors in recent
years.
The debtors and purposes behind China's debt expansion are
roughly the same with high-income countries and regions at the same
stage of development. During the peak of their industrialization,
the borrowers in well-performing economies such as Germany, Japan and the Republic of Korea were
enterprises, particularly industrial enterprises. After the peak of
industrialization, the main borrowers shifted to the government and
household sectors, with the proportion of government borrowing in
total debt also on the rise.
China has not overborrowed from the perspective of its total
debt volume. The function of debts is to transform savings into
investment, enable consumption smoothing, and create financial
assets. All these functions indicate that creating too much debt
leads to a lot of investment and consumption, strong purchasing
power, and consequently inflation and currency depreciation.
However, this has not been the case for China. Over the past
decade, China has not faced inflationary pressure. Instead, the
nation has been frequently confronted with lackluster demand.
China's average annual consumer price index growth rate has been
less than 2 percent during the period, and the nominal exchange
rate of the yuan against a basket of currencies has appreciated by
15 percent. This indicates that China has not created excessive
financial assets and purchasing power. The nation's financial
assets are mainly debt-based. China's creation of financial assets
relative to GDP is not high considering its total debt-based and
equity-based financial assets. The financial assets of the United States, Japan, China, and Germany are 13.4 times, 15.7 times, 3.6 times,
and 3.7 times their GDP respectively. Therefore, China's financial
assets, relative to GDP, are not prominent.
From a structural perspective, China needs to further optimize
its debt structure. The nation's two main borrowers are faced with
significant debt pressure. The first major borrower is local
government financing platforms. Over the past decade, such
platforms have borrowed heavily as they invested in projects such
as urban roads and public infrastructure — projects with low
commercial investment returns. Many local government financing
platform operators are struggling to cover their debt costs with
their revenue. The second major borrower is real estate
enterprises. Chinese real estate enterprises have high debt ratios,
and in recent years, the sharp decline in home sales and the
nosedive in financing from financial institutions have left many
real estate companies unable to repay their debts.
China has ample policy space to address its structural debt
issues. It requires the intervention from macroeconomic regulators
and the support from government credit to solve the hidden debts
faced by local governments and real estate debt problems. Whether
the government can expand credit is not determined by how high the
government's existing debt or its debt ratio is, but by the balance
between private sector savings and investment. If private sector
savings exceed investment, an increase in government borrowing and
spending will not lead to inflation or threaten monetary credit,
and thus the government can expand credit. If the demand for
private sector savings is far outweighed by investment, and the
economy is overheated with inflationary pressure, the government
should not expand its credit scale, as it would lead to damage to
monetary and government credibility. Currently, private sector
savings far exceed investment in China, and there is no overheating or
inflationary pressure in the nation, which provides ample policy
space for the government to expand credit.
It is necessary for China to adopt more proactive measures to
expand its debt. The most prominent macroeconomic problem facing
China is insufficient demand, leading to low corporate
profitability, fewer newly added jobs and weak investor
expectations. The most common and effective policy tool to address
insufficient demand is counter-cyclical policy, using lower
interest rates and increased government borrowing to boost
spending, in order to drive credit and spending growth across
society. These policy tools are very helpful in reducing debt
pressure and mitigating debt risks. International experience and
China's past experience show that the reduction of the scale of
debt makes it even more difficult for borrowers to repay their
debts. This is because reducing the debt scale also greatly reduces
income, which would also increase the debt ratio. By reducing the
policy interest rate and expanding government spending, the
government can reduce debt interest costs and raise income levels.
Doing so would also improve the capacity to repay debts, mitigate
debt risks, and reduce the debt leverage ratio.
The author Zhang Bin is deputy director of the Institute of
World Economics and Politics at the Chinese Academy of Social
Sciences. The author contributed this article to China Watch, a
think tank powered by China
Daily.
The views do not necessarily reflect those of China Daily.
View original content to download
multimedia:https://www.prnewswire.com/news-releases/pay-down-time-302202615.html
SOURCE chinadaily.com.cn