China's Government Debt Is Ballooning -- Here Are 5 Reasons Why You Can't Say It's Out Of Control

Chinese total government debt, including contingent debt which is guaranteed by the government, climbed to 30.3 trillion renminbi (approx $US5 trillion) as of mid-2013, according to the latest data from the National Auditing Office.

Local government debt accounts for 17.9 trillion renminbi of the total (about $US2.8 trillion). This is up from 10.7 trillion renminbi at the end of 2010.

This is up nearly 67% from the last reading of local government debt taken about three years ago.

Rising local government debt has had many concerned about an impending financial crisis in China. Part of the problem is that local governments borrowed from commercial banks and trusts which have high interest rates and short durations, about six months to three years. But these have been used to finance long-term construction projects, many of which don’t pay off.

Zhang Ke, a senior Chinese auditor rang the alarm back in April, when he told the Financial Times he would no longer sign off on local government bond sales, adding that the debt problem was “out of control.”

Bank of America’s Ting Lu writes that there are reasons to be concerned about the rising debt but that he doesn’t think a financial crisis is around the corner for five key reasons. Here they are verbatim:

  1. China’s central government has a very low debt-to-GDP ratio at 21%, and it has massive cash savings equivalent to 6% of GDP.
  2. Almost all government debt is denominated in RMB and owned by domestic entities, meaning the People’s Bank of China can prevent a public debt crisis with its unlimited capability for liquidity supply.
  3. China has huge national savings with US$3.5tn FX reserves, 20% reserve requirement ratio and just 65% loan-to-deposit ratio.
  4. Both the central and local governments own quite large good assets.
  5. Despite the slowdown, China still has high economic growth and fiscal revenue growth.

Of course this doesn’t mean that Beijing has no reason to worry. The pace at which local government debt has grown is grounds for concern.

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