Mar. 4 – Victor Shih, a respected economist at Northwestern University, has suggested that China’s hidden borrowing will push government debt up to 96 percent of GDP in 2011 and that the expectation of a “large scale” financial crisis in China will come to pass in 2012.
Shih spent months evaluating over 8,000 local China government borrowing transactions and has published his findings in his book “Factions and Finance in China.”
Local government borrowing has surged in recent months and has been unaccounted for in official estimates of China’s debt to GDP ratio, Shih claims. China’s expected debt to GDP ratio for 2010 is 22 percent according to the IMF.
In comparison, the United States’ debt to GDP ratio is 94 percent, the United Kingdom is at 380 percent, Japan at 227 percent, Greece at 115 percent and Spain at 70 percent.
Shih’s estimates indicate that local government borrowing may result in bad debt of up to a quarter of all outstanding loans. The implications are for a massive China slowdown in 2012 and a recession likely to last for at least two years.
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I’m not an economist, and don’t fully understand this. Why is it bad if China’s debt to GDP ratio is set to be 96% when the US is at 94%, Japan is at 227% and the UK at 380%? It makes the Chinese actually seem prudent rather than reckless. Does anyone else understand this and can explain?
From an amateur economist.
I would add that government debt is in itself not necessarily a bad thing. If debt is taken on for items such as essential infrastructure developments, education, health care, etc.. it could be considered as “investments in society”. These investments could make for a knowledgeable, innovative society with a pleasant environment which could then theoretically pay itself through a rising GDP. A higher GDP means more taxes for the country and a reduction in the public debt.
You would think that what I have stated is self-evident. Not so. The professional political clowns in most developed countries live off “lobbyists’ contributions” and receive other people’s money as “pork”. They don’t spend taxpayers’ money usefully nor frugally. Instead the politicians use the money to pay back the various groups that support them politically either directly in the form of grants or indirectly as tax breaks.
China is at least spending money on roads, railways and other infrastructure projects and while they may be under-utilized at the moment they have kept the country’s economy growing. As a bonus China will have better infrastructure ready for when the world economy picks up.
China may not be as economically powerful as the USA but it’s economic development can still be felt elsewhere. Australia has managed to ride out the financial crisis reasonably well. It is the only developed country to have had economic growth last year. This is partly because the latter’s government doesn’t have an aversion for engaging China in trade and economic matters.
I’d like to reply directly to “The_Observer,” above, regarding China’s gleaming new infrastructure. Have you actually OBSERVED a construction project in China over the course of a couple weeks or months? Have you ever spent time in a Chinese city walking around a construction site and observed the level of quality, the adequacy of materials, and the building standards being deployed? Have you ever observed new buildings falling apart before they are even occupied? Have you observed a bridge or street being repaired in a way that ensures it will need to be re-done in a year or less? You wrote: “As a bonus China will have better infrastructure ready for when the world economy picks up.” It seems you’ve made a direct correlation between building something now, and having something useful and valuable in the future. That’s a natural and logical correlation to make, as long as you are observing from your home in the West, and have never had a chance to observe things in China firsthand. I would have made the same mistake had I not lived in China for much of the past 7 years.
Guys thanks for these. There is a strong school of thought – that I have heard for many years but has rather been forgotten that says that much of China’s GDP growth is in unnecessary building projects and therefore isn’t totally real. I’d agree. I’d also agree with Peters observation that much of that construction – especially residential building (and some commercial) is “tofu” in content and rather shoddy. Not the way to build a lasting economy that isn’t in constant need of repairs.
Chris, high debt/GDP is not necessarily a bad thing. It depends upon when country has to repay its debt, for ex is it a short term debt, or is it a long term debt. In case of Greece and UK. Investors went after Greece because there day of reckoning (repayment) has come, whereas UK has (for most part) long term debt and hence its fine for NOW. That means countries like UK, Japan will have chance to lower there debt. Similarly, if China’s debt is long term than it should be fine otherwise we will see Investors running away from its bond issues. That means China will have to not only repay its debt, but, its future borrowing will have to have high yield to cover the risk factor.
For the first time, I’ve read about construction quality in China. I’ve heard a thousand nice words about its growth and Shanghai. Never heard these. I wonder why? As not a big fan of China I kind of think why they do it? On the other hand, as a human, I do not wish that they would screw themselves up and not build a good infrastructure and put necessary conditions in place – there are so many poor people’s future at stake.
Hi Chris,
One aspect of DEBT/GDP that has not been mentioned thus far, is what percentage of that debt is foreign debt and what percentage is local debt. China’s debt is mainly local debt, which it can postpone paying or even renege on it. Consequently, the debt is not that frightening. Japanese Govt. debt is almost entirely owed to Japanese citizens whereas US Govt. debt is largely owed to foreigners like China, Japan, etc, etc.
Thus, whenever DEBT/GDP is discussed the component of foreign debt to local debt should be mentioned.
Cheers,
Carlos.
The comments are all actually more interesting and insightful than the original article.
Gentlemen,
Thoughtful discussion. I too have spend the last 15 years dealing with China including four years as a resident General Manager of a Construction machinery Company that was a joint venture between an American multinational and a large Chinese group. In addition I have lived and worked in Brazil, U.S. and India.
My observations are that the shape of a society is determined or driven by cultural factors. Sort of the society is like a forest and the individual people are like trees. From crooked people you can not expect an outstanding society.
Specifically the Chinese culture is a culture of shame versus the western culture, in general is a culture of guilt. People intrinsically know right from wrong even while doing bad things they generally know it is wrong. Chinese culture on the hand is driven by shame i.e. nothing is right or wrong as long you do not get caught. This also explains the out of proportion respect to authority-never question the character, but only how the boss should be pleased.
As a General manager I noticed this in every aspect-from watching employees stepping over broken light bulbs to lousy quality in practice. This is particularly true in construction. A friend of mine looked at the apartments being constructed and labeled them as instant ruins.
Among other drivers of shoddy construction are greed and no moral/ethical compass in particular at the middle management level. Yes this attitude will change, but it will take decades.
So as a wry Historian may say-” History is about boots going up and slippers coming down”. Chinese are indeed wearing boots and the U.S. is wearing the slippers on a macro level. However, the cultural changes will take a lot longer than the macro picture may indicate.