February 27, 2012

THE DRAGON HAS NO TEETH:

How Will China Pay Off Its Debt? (Gordon G. Chang, 2/26/12, Forbes)

The 16.3% calculation excludes Beijing's "hidden liabilities."  Once you add them in, China's debt-to-GDP ratio increases to somewhere between 90% and 160%.  And if you believe Beijing has been overstating its GDP recently--it has, at least starting from the last quarter of last year--China's ratio approximates Greece's 164%.

Analysts, surprisingly, don't seem to be concerned about Beijing's debt, no matter how it is calculated.  As Tom Holland of the South China Morning Post points out, the assumption is that China can grow its way out of this problem because it has always been able to do so in the past.

China's economy, despite the Economist's assessment, is already landing hard.  January's results were dismal--the economy looks like it may even have contracted last month--and there will not be much improvement until the summer, if then.  If there is no marked uptick this year, Beijing faces difficult choices because, as the "ghost city" phenomenon indicates, there has been a gross misallocation of capital since the end of 2008.

What are Beijing's choices?  First, central government technocrats could force the banks to absorb losses.  At first glance, it appears the banks could afford substantial write-offs.  The industry's non-performing loan ratio was 0.96% at the end of last year, down from an already unbelievable 1.14% at the end of 2010.  Yet the central government will not force banks to write off large quantities of loans because the year-end 2011 ratio does not reflect the real state of bank balance sheets.  The Ministry of Finance could again recapitalize the banks, but that may not be feasible.  The central government has yet to clear all the bad loans from the big bailout at the end of the 1990s.  China's hidden liabilities include warehoused loans from that era, which Holland estimates amount to 7.5% of GDP.

So there is no or minimal growth, the banks are not strong enough to shoulder significant losses, and the central government is weighed down by 1990s-era bad loans.  What is a central government technocrat to do?

"Beijing can take the path traditionally followed by other governments around the world and inflate its way out of the problem," Holland wrote on Friday.  


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Posted by at February 27, 2012 6:13 AM
  

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