1/14
Interesting IMF Working Paper on the evolution in China's fiscal policy and its impact on government debt and balance sheets. It has great information, especially historical data, on central- and local-government debt and financial assets.
imf.org
Interesting IMF Working Paper on the evolution in China's fiscal policy and its impact on government debt and balance sheets. It has great information, especially historical data, on central- and local-government debt and financial assets.
imf.org
2/14
Where I disagree with the authors (perhaps not surprisingly, regular readers will say) is in their recommendation on how to get China's burgeoning debt under control. I would argue that they are confusing the locus of debt creation with the source of rising debt.
Where I disagree with the authors (perhaps not surprisingly, regular readers will say) is in their recommendation on how to get China's burgeoning debt under control. I would argue that they are confusing the locus of debt creation with the source of rising debt.
3/14
In their conclusion they say: "Our findings suggests that the Achilles heel for China lies with local governments and SOEs, underscoring the urgency of a comprehensive restructuring agenda and institutional fiscal reforms."
I agree. That is where the debt problem lies.
In their conclusion they say: "Our findings suggests that the Achilles heel for China lies with local governments and SOEs, underscoring the urgency of a comprehensive restructuring agenda and institutional fiscal reforms."
I agree. That is where the debt problem lies.
4/14
They continue: "Efforts to contain LGFV’s leverage should be complemented with action to phase out implicit guarantees and to strengthen the corporate and banking restructuring frameworks."
They continue: "Efforts to contain LGFV’s leverage should be complemented with action to phase out implicit guarantees and to strengthen the corporate and banking restructuring frameworks."
5/14
"In parallel, SOE budget constraints should be hardened by ending the implicit guarantees and preferential access to credit and carefully allocating losses to owners and creditors."
"In parallel, SOE budget constraints should be hardened by ending the implicit guarantees and preferential access to credit and carefully allocating losses to owners and creditors."
6/14
Their recommendation, in other words, is to limit the ability of LGFVs and SOEs to run up debt by imposing budget constraints on them.
That sounds plausible on the surface because much of the surge in debt in the past decade occurred on the balance assets of LGFVs and SOEs.
Their recommendation, in other words, is to limit the ability of LGFVs and SOEs to run up debt by imposing budget constraints on them.
That sounds plausible on the surface because much of the surge in debt in the past decade occurred on the balance assets of LGFVs and SOEs.
7/14
But while these represent the locus of debt creation, they are not the cause of debt creation. The surge in debt on their balance sheets was driven by the role they are expected to play in achieving the excessively high GDP growth rates Beijing set for political reasons.
But while these represent the locus of debt creation, they are not the cause of debt creation. The surge in debt on their balance sheets was driven by the role they are expected to play in achieving the excessively high GDP growth rates Beijing set for political reasons.
8/14
To the extent that Beijing sets growth rates that exceed what the economic can achieve productively, economic activity must migrate from those parts of the economy constrained by hard budgets (mainly the private sector) to those parts that aren't so constrained.
To the extent that Beijing sets growth rates that exceed what the economic can achieve productively, economic activity must migrate from those parts of the economy constrained by hard budgets (mainly the private sector) to those parts that aren't so constrained.
9/14
Debt had to surge, in other words, because of the excessively high GDP growth targets set by Beijing, and for institutional reasons it surged mainly on the balance sheets of SOEs and LGFVs. They were the most convenient locus of debt creation.
Debt had to surge, in other words, because of the excessively high GDP growth targets set by Beijing, and for institutional reasons it surged mainly on the balance sheets of SOEs and LGFVs. They were the most convenient locus of debt creation.
10/14
But they were not the cause. When the authors recommend that LGFVs and SOEs are placed under hard budget constraints, they are just recommending that in the future SOEs and LGFVs be included in those parts of the economy constrained by hard budgets.
But they were not the cause. When the authors recommend that LGFVs and SOEs are placed under hard budget constraints, they are just recommending that in the future SOEs and LGFVs be included in those parts of the economy constrained by hard budgets.
11/14
But without changing the growth strategy, it just shifts the locus of debt creation to some other, less budget-constrained, part of the Chinese economy, and because the debt must still be implicitly guaranteed by Beijing, the shift will accomplish nothing substantial.
But without changing the growth strategy, it just shifts the locus of debt creation to some other, less budget-constrained, part of the Chinese economy, and because the debt must still be implicitly guaranteed by Beijing, the shift will accomplish nothing substantial.
12/14
It is always tempting to blame a country's rising debt on the entities on whose balance sheet the rise in debt occurs, but as I argue in this piece (on the structural reasons for the rise in US debt), this is usually a mistake.
ft.com
It is always tempting to blame a country's rising debt on the entities on whose balance sheet the rise in debt occurs, but as I argue in this piece (on the structural reasons for the rise in US debt), this is usually a mistake.
ft.com
13/14
Chinese debt has surged in the past 15 years for structural reasons, and not because of irresponsible behavior on the part of sloppy SOEs and LGFVs. Until those structural reasons are reversed, debt must continue to rise, and the only question is on whose balance sheet.
Chinese debt has surged in the past 15 years for structural reasons, and not because of irresponsible behavior on the part of sloppy SOEs and LGFVs. Until those structural reasons are reversed, debt must continue to rise, and the only question is on whose balance sheet.
14/14
That means that as long as Beijing continues to set excessively high GDP growth targets, forcing hard budget constraints onto SOEs and LGFVs will not address China's debt problem. It will merely shift the locus of debt creation, perhaps even into riskier forms.
That means that as long as Beijing continues to set excessively high GDP growth targets, forcing hard budget constraints onto SOEs and LGFVs will not address China's debt problem. It will merely shift the locus of debt creation, perhaps even into riskier forms.
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