2/10
The argument is that if Beijing would now assume local-government debt, the financing cost of all these infrastructure projects would drop substantially, and so local government debt would create less of a problem for the Chinese economy.
The argument is that if Beijing would now assume local-government debt, the financing cost of all these infrastructure projects would drop substantially, and so local government debt would create less of a problem for the Chinese economy.
3/10
This simply isn't true. While the borrowing cost matters to the profitability of an entity that undertakes a project, it only matters to the extent that it shifts the allocation of costs. In itself it tells us nothing about the underlying economic value of project.
This simply isn't true. While the borrowing cost matters to the profitability of an entity that undertakes a project, it only matters to the extent that it shifts the allocation of costs. In itself it tells us nothing about the underlying economic value of project.
4/10
If you invest $100 of resources in a project that creates less that $100 of economic value, the economy is worse off, but if you are able to borrow at a negative real rate, you might actually make a profit on the project, but only by passing the loss onto the lender.
If you invest $100 of resources in a project that creates less that $100 of economic value, the economy is worse off, but if you are able to borrow at a negative real rate, you might actually make a profit on the project, but only by passing the loss onto the lender.
5/10
The real problem, in other words, is not that local government borrowing cost. It is that the resources invested in the project exceeded the economic value the project created, creating a loss for the economy. The interest rate is just part of how that cost is allocated.
The real problem, in other words, is not that local government borrowing cost. It is that the resources invested in the project exceeded the economic value the project created, creating a loss for the economy. The interest rate is just part of how that cost is allocated.
6/10
Let's say, for example, that the PBoC had set interest rates 1 percentage point lower. In that case local governments would have benefitted from a reduction in their interest payments. But net lenders (and ultimately this means households) would have seen their net...
Let's say, for example, that the PBoC had set interest rates 1 percentage point lower. In that case local governments would have benefitted from a reduction in their interest payments. But net lenders (and ultimately this means households) would have seen their net...
7/10
income drop by exactly the same amount. Lower interest rates wouldn't have reduced the loss to the Chinese economy, in other words. They would have just worsened the underlying income imbalances and made China even more reliant on wasteful projects to generate "growth".
income drop by exactly the same amount. Lower interest rates wouldn't have reduced the loss to the Chinese economy, in other words. They would have just worsened the underlying income imbalances and made China even more reliant on wasteful projects to generate "growth".
8/10
The point is that a wasteful project doesn't become more rational for the overall economy just because local governments can pass part of the loss onto someone else. In fact depending on how the loss is transferred, it can leave the economy worse off.
The point is that a wasteful project doesn't become more rational for the overall economy just because local governments can pass part of the loss onto someone else. In fact depending on how the loss is transferred, it can leave the economy worse off.
9/10
If Beijing were to assume local-government debt, the total financing cost for each project would of course be lower, but that wouldn't benefit the Chinese economy. The same losses would still be absorbed by the economy, just by a different entity.
If Beijing were to assume local-government debt, the total financing cost for each project would of course be lower, but that wouldn't benefit the Chinese economy. The same losses would still be absorbed by the economy, just by a different entity.
10/10
Over the next few years we'll hear many proposals to "resolve" the problem of years of non-productive investment by lowering the debt-servicing costs. Eventually we'll realize that these don't reduce the losses. They merely shift the losses to other parts of the economy.
Over the next few years we'll hear many proposals to "resolve" the problem of years of non-productive investment by lowering the debt-servicing costs. Eventually we'll realize that these don't reduce the losses. They merely shift the losses to other parts of the economy.
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