While China’s recent audit of its local debt situation has revealed that in terms of size, it doesn’t seem to be much of an issue, the pace at which these governments are accumulating debt is “terrifying,” according to Societe Generale’s Wei Yao.
Yao points out that, while China’s total debt to GDP level is less than the U.S. or Europe, with a greater growth rate to boot, its pace of debt accumulating far surpasses its two rivals.
From Wei Yao:
However, China’s local government debt problem is scary in different ways. A simple calculation based on the information available in the report suggests that the total debt load increased 36 times in nominal terms and five-fold relative to GDP between 1997 and 2010! More than 80% of the money has gone to finance hard infrastructure. Economically speaking, an increasingly bigger share of total capital has been allocated to the public sector, and the marginal return of each borrowed yuan has been on a steady decline. In the last three years, total liabilities of local governments nearly doubled in size and ballooned from 17% to 27% of GDP. The health of China’s public debt and investments is deteriorating at its fastest pace ever.
Further digging into the details on the debt, Yao finds that 70% of the debt is due in 5-years, and 25% is backed by revenue from land sales. Yao believes, “a property sector slowdown could seriously threaten local governments’ debt sustainability.”
Note the scale of the debt growth in the last 13 years in China:
Photo: Societe Generale
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