Chinese Economics Thread
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Blackstone
Brigadier
Hendrik_2000
Lieutenant General
I don't know where the western press get their number of China debt ratio of 240% of GDP. Because according to China finance minister the central government debt is 40% of GDP which is 4 trillion dollar and the estimated local government debt is 2.5 trillion US so total is 7.5 trillion or 75% of GDP. Of course if you add the private and corporation debt it will be astronomical but so do the US debt
The deficit target of 3 percent of gross domestic product announced Saturday, up from last year's 2.3 percent, is in line with the ruling Communist Party's long-term reforms, Lou Jiwei said. He spoke at a news conference during the annual meeting of China's legislature.
Chinese leaders, long seen as skilled managers, are scrambling to reassure companies and investors the world's second-largest economy is on track following stock market and currency turmoil.
Growth has declined steadily as the ruling party tries to steer China toward a self-sustaining expansion based on domestic consumer spending instead of trade and investment. But an unexpectedly sharp deceleration over the past two years sparked fears of politically risky job losses and prompted Beijing to launch mini-stimulus measures.
"We are increasing the debt-to-GDP ratio to support achieving a medium- to high-speed rate of economic growth," said Lou. "Why do we do that? Because we don't want to see a decrease in economic growth and because we want to give strong support to structural reform."
The Chinese leadership has lowered this year's economic growth target, also announced Saturday at the opening of the legislature, to 6.5 to 7 percent from last year's "about 7 percent." Growth fell last year to a 25-year low of 6.9 percent, though that still was among the world's highest.
On Sunday, the chairman of the Cabinet's planning agency said there was no danger of a "hard landing," or dangerously sharp drop in growth.
Lou, the finance minister, acknowledged China's overall debt load has risen, partly due to stimulus spending in response to the 2008 global crisis. But he said the government still can afford to finance its deficits.
Government debts are "not very high" at 11 trillion yuan ($1.7 trillion) or the equivalent of 40 percent of GDP, Lou said. That compares with over 230 percent of GDP for Japan, which is struggling to restore balance as its population swiftly ages, driving costs for health and elder care higher.
"The central government has room to continue to issue bonds," he said.
Lou said Beijing needs to do more to control debts owed by local governments. A rapid run-up in such debt has raised concern about possible defaults and the impact on the state-owned banking system.
Last week, Moody's Investors Service cut its outlook on China's government credit rating from stable to negative, citing rising debt, capital outflows and "uncertainty about the authorities' capacity to implement reforms."
A Chinese deputy finance minister retorted that Moody's was wrong and shortsighted in comments Friday reported by the government's Xinhua News Agency.
Local government debt
China, whose cooling economy has spooked investors worldwide, has long sought to deal with a mountain of local government debt - a legacy of unbridled spending during the global financial crisis. It was estimated by the audit office at 17.9 trillion yuan ($2.9 trillion) at the end of June
2013.
The debt ratio of local governments will be set at 86 percent, Xinhua said.
Outstanding local government debt stood at 15.4 trillion yuan as of the end of 2014, the agency said.
Local governments will be allowed to increase their outstanding debt by 600 billion yuan during the rest of this year.
The Ministry of Finance has allowed local governments to swap 1 trillion yuan of maturing, high-interest local debt for new municipal bonds to reduce interest costs, but demand for such bonds has been weak.
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The deficit target of 3 percent of gross domestic product announced Saturday, up from last year's 2.3 percent, is in line with the ruling Communist Party's long-term reforms, Lou Jiwei said. He spoke at a news conference during the annual meeting of China's legislature.
Chinese leaders, long seen as skilled managers, are scrambling to reassure companies and investors the world's second-largest economy is on track following stock market and currency turmoil.
Growth has declined steadily as the ruling party tries to steer China toward a self-sustaining expansion based on domestic consumer spending instead of trade and investment. But an unexpectedly sharp deceleration over the past two years sparked fears of politically risky job losses and prompted Beijing to launch mini-stimulus measures.
"We are increasing the debt-to-GDP ratio to support achieving a medium- to high-speed rate of economic growth," said Lou. "Why do we do that? Because we don't want to see a decrease in economic growth and because we want to give strong support to structural reform."
The Chinese leadership has lowered this year's economic growth target, also announced Saturday at the opening of the legislature, to 6.5 to 7 percent from last year's "about 7 percent." Growth fell last year to a 25-year low of 6.9 percent, though that still was among the world's highest.
On Sunday, the chairman of the Cabinet's planning agency said there was no danger of a "hard landing," or dangerously sharp drop in growth.
Lou, the finance minister, acknowledged China's overall debt load has risen, partly due to stimulus spending in response to the 2008 global crisis. But he said the government still can afford to finance its deficits.
Government debts are "not very high" at 11 trillion yuan ($1.7 trillion) or the equivalent of 40 percent of GDP, Lou said. That compares with over 230 percent of GDP for Japan, which is struggling to restore balance as its population swiftly ages, driving costs for health and elder care higher.
"The central government has room to continue to issue bonds," he said.
Lou said Beijing needs to do more to control debts owed by local governments. A rapid run-up in such debt has raised concern about possible defaults and the impact on the state-owned banking system.
Last week, Moody's Investors Service cut its outlook on China's government credit rating from stable to negative, citing rising debt, capital outflows and "uncertainty about the authorities' capacity to implement reforms."
A Chinese deputy finance minister retorted that Moody's was wrong and shortsighted in comments Friday reported by the government's Xinhua News Agency.
Local government debt
China, whose cooling economy has spooked investors worldwide, has long sought to deal with a mountain of local government debt - a legacy of unbridled spending during the global financial crisis. It was estimated by the audit office at 17.9 trillion yuan ($2.9 trillion) at the end of June
2013.
The debt ratio of local governments will be set at 86 percent, Xinhua said.
Outstanding local government debt stood at 15.4 trillion yuan as of the end of 2014, the agency said.
Local governments will be allowed to increase their outstanding debt by 600 billion yuan during the rest of this year.
The Ministry of Finance has allowed local governments to swap 1 trillion yuan of maturing, high-interest local debt for new municipal bonds to reduce interest costs, but demand for such bonds has been weak.
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The more than 240% of GDP number is government, household and corporate debt put together. But in the article it states that China's national debt ie the central government debt is only 11 trillion yuan or 1,7 trillion dollars that's less than 17% of GDP. In order to get to the 40% of GDP you have to add the local government debt of 2,9 trillion dollars to that number.
Hendrik_2000
Lieutenant General
Thanks for correcting me and you are right 16 trillion yuan of 2.5 trillion USD is the total local government debt. So basically it is the household and corporation debt that is 200% of GDP but household debt is basically mortgage and in China they have high down payment rate 40% in some cases. And the corporation debt is again mostly related to real estate or SOE. Which worse come to worse they can sell it . And with urbanization rate of 56% there is definitely demand for decent housing . So the conclusion is that meltdown like the 2008 financial crisis is quite remote
China's government debt is not so high, and Beijing will continue to allow local governments to swap debt, Finance Minister Lou Jiwei said in Beijing on Monday.
A total of 5 trillion yuan ($767.71 billion) of local government debt will come due this year, while the outstanding amount of such debt stood at 16 trillion yuan at the end of last year, Lou said at a news conference in Beijing.
Lou added that he believes the risk of local government debt is under control.
ADVERTISING
(Reporting By Xiaoyi Shao and Beijing Monitoring Desk)
China's government debt is not so high, and Beijing will continue to allow local governments to swap debt, Finance Minister Lou Jiwei said in Beijing on Monday.
A total of 5 trillion yuan ($767.71 billion) of local government debt will come due this year, while the outstanding amount of such debt stood at 16 trillion yuan at the end of last year, Lou said at a news conference in Beijing.
Lou added that he believes the risk of local government debt is under control.
(Reporting By Xiaoyi Shao and Beijing Monitoring Desk)
Engineer
Major
As I pointed out before, western lame stream media's reporting about China's economy is basically a projection of situation in the west on to China. Why does the media makes articles about debt in China? There is an even bigger pile of debt in the west, that's why. How many Payday loan has popped up since 2009? How many people have unmanageable credit card debt? How many collage grads have student loan that will never get paid off by the time they reach retirement age? It is just like 2008 when western lame stream media harps about China's non-performing loans. The western economy is now based on debt -- spend tomorrow's money today! That's where "growth" come from. Sooner or later, people are going to run out of credits, and even that "growth" will dry up. At least China has real growth.
I would agree with that. ^^^
Fed's latest data today showed student loans standing at 1.32 trillion dollars end of Dec, credit card debts rose a bit over 10 billions in Jan. Not counting mortgage, total consumer debt is at $3.54 trillions.
It's actually a good time for China opening up debt market. Euro and Yen have been exporting deflation on a scale so massive even treasuries yields are effected. Tomorrow ecb meeting would cut again and easing would extend to next year. Japan's second reading of her Q4 gdp not is uplifing as well. It's a good time for expending credits as you would pay low to borrow and the emergence of follow on derivative markets would help a lot for RMB expansion into global finance other than trade settlement.
The problem with these news report is that they don't mention the other side of debt, the assets. If they mention the asset side of the equation, not to mention the firepower of whole Chinese state and her full range of institutions and tools, this debt scare is just a story of growing pains, which, when stretches out over a time, would ease away percentage wise and become manageable as the ruling party doesn't need to worry about re-elecitons or quarterly reports.
3% fiscal deficit is not highly controversial, 6 tenth of a percent increase from last year I believe. Besides, there are a lot of goodies for the common folks, like tax deductible mortgage payments to promote urbanization, deductible child care expenses to stimulate population growth, etc. So one side is chopping off commodities side of the economy and other side is boosting social benefits and services. It evens out, so commodity currencies like aud could enjoy the upside now as market covering their shorts. Then again 3 billion barrels of surplus oil building up since 2014 would help China finance her industrial drawdown and IT build-out.
Equation
Lieutenant General
The Chinese debt scare are for the Bear investors trying to salvage some of their money back.
plawolf
Lieutenant General
Indeed, I think world economists really need to make a clear distinction between consumption driven debt and investment driven debt.
If you borrow to consume (be it private or government), what you are doing is bring forward consumption from the future to spend more now at the expense of your future spending and consumption power. That is wholly unsustainable and highly problematic.
Investment driven debt is very different because that money is used to finance investments, which if made wisely, will yield an economic return. Again, if invested right, that return on investment should not only cover the finance costs (interest payments) but also cover some of the principle (original amount borrowed) such that the investment effectively pays for itself throughout the loan repayment period, and then generates you a net profit after the loan has been fully paid off. That's not only sustainable, but profitable.
Western governments and consumers typically borrow to consume, either on credit card financed consumer goods for the individual, or on generous social welfare and healthcare costs for the government (bribe to voters).
China, on the other hand, be it at individual or governmental level, typically borrows to finance investment.
This is why I always scoff when western economic pundits selfishly pontificate about China needing to switch to a consumer driven economy.
That's peddling China the same rotten medicine that is hobbling their own home economies!
What they really want is to take China's nest egg for themselves! For China to go bananas buying up all the cutting edge financial products, healthcare and other non-tangible assets and services they are world leaders at providing, so their home economies can cash in enough to pay off their own debts and then make China pay them interests for all time so they can continue to live well beyond their means.
They are not advocating what is best for China, but trying to trick and pressure China into diving under the bus to give themselves a tiny glimmer of hope of being able to dig themselves out of their own hole by taking China's hard earned savings hand over fist as fast as they can.
Fortunately, China's leaders are technocrats and are smart enough to easily see through all the mass market BS.
The actual key to switching from an investment to a consumption driven economy is actually wealth, not spending habits.
Trying to prematurely force the economy into a consumer driven economy by getting people into the bad habit of spending tomorrow's money today is a recipe for disaster.
The only way a sustainable transition can occur is if the people and the economy are wealthy and high earning enough that their regular, sustainable spending is enough to generate a market demand big enough to drive your economy.
As such, a consumer driven economic is actually an indicator of the power of your economy, rather than being a tool to make your economy more powerful.
That is a simple, but fundamental rule that a surprising number of western economic media pundits simple do not appear to be able to grasp.
The key to getting to that state is, ironically, something they now label as a 'weakness' and 'problem' for the Chinese economy - rising wages.
While it is true that at the start of economy development, rock bottom wages is a boon to the economy as it gives them price competitive advantages, that's not a sustainable model of economy development unless one is content to forever sit at the very bottom of the economic food chain and make basic cheap goods for tiny profits.
Moving up the value chain is the key towards economic advancement and ultimately achieving a consumption driven economy, and that is precisely what China is doing. And how do you move up the value chain? Well with investment of course!
As any first year economics student can tell you, new developing economies typically have one or both of the two key advantages that can help them get going. Those are the natural resources endowment, and human resources endowment.
New developing economies can generate a lot of income fairly quickly, easily and cheaply by exploiting its untapped natural resources, and the low cost of its labour.
In my view, countries get stuck in the so-called middle income trap because they fail to make the most of this initial windfall to invest and move up the value chain fast enough or for long enough by acquiring bad economic habits because their economists and leaders did not grasp the fundamental rule I mentioned earlier.
They were too quick to start enjoying the early fruits of their labour and thought that by promoting consumption, they would be able to magically arrive at the holly grail of a consumption driven economy before they had acquired the wealth and spending power critical mass to make a consumption based economy viable.
Rather than continue to invest to move up the value chain and grow wages (spending power), they instead started to consume more, and lost momentum and its earlier competitive advantage as advanced, consumption driven economies continued to invest, innovate and move up the value chain, while newer emerging economics took much of the low cost work they originally relied upon, but which are now not competitive in because of the raised wages and living standards of its people.
If you look at average income per head, you can see that China is still some way off from having the spending power to be sure of breaking into the consumption driving economic club despite the size of its population.
OTOH, after all those decades of break-neck investment, the choicest investment opportunities had already been taken, and increasingly, yields are falling on new investment as the country nears investment saturation. At the same time, there western economies are tightening their belts as a result of their own economic chickens coming home to roost.
That is where China finds itself currently.
So what is the solution? The one road one belt initiative backed up by the newly created AIIB.
China's economy is geared towards, and supremely effective at massed infrastructure projects. So it is going to create a vast new market and invest infrastructure abroad.
Yields on those new, basic investments are going to be vastly superior to what can now be achieved in China. And the best thing is that all the equipment, labour and products are already fully developed.
That means there is going to be little to no R&D overhead associated with those projects, which in turn means more profits and/or more competitive pricing.
That foreign infrastructure investment income is going to finance Chinese firms to continue moving up the value chain as it upgrades China's existing infrastructure back at home. In doing so, they are developing the technologies, tools and procedures that can be exported at a later date to upgrade the infrastructure it is building abroad.
All that infrastructure investment in neighbouring countries should also generate economic growth in those countries, and that in turn creates new demand and markets, which are already supremely well connected to China and its vast marketplace.
It's a brilliant strategy the more you think about it. China would effectively be corning much of that new market it is creating, since all the transport links lead to China first and foremost. That's going to immediately give its firms a cost and response time advantage that other foreign competitors would find hard to compete with and not break any trade rules.
Once connected to the Middle East, that will help to secure China's energy supplies from the threat of naval blockade. Once connected to Europe, that opens up the way for vastly reduced shipping costs and transport times to one of its primary markets. Later they can connect Africa and have a whole continent to sell infrastructure to, tap resources and create new customers.
That's enough work to keep China busy for the next 50 years at least. By which time Chinese GDP would be several times the size of America's and per capita income should be comparable or even significantly higher depending on how well growth is sustained. By that time, China would have long since transitioned to a consumption based economy without really needing to change any of its domestic spending patterns and habits.
We are seeing some rough times now, but once the big projects starts kicking off in central Asia, the good times will start to roll again for China.