Teaching Comparative Government and Politics

Tuesday, July 30, 2013

Living on borrowed money

The Chinese people have one of the world's highest savings rates. Where do all those savings go? A lot get loaned to the US (buying government bonds). But a lot more of those savings are borrowed (selling bonds) by government at various levels.

It turns out that China might have debt problems like those in Greece and Portugal.

China orders audit of government debt

China has ordered a nationwide audit of all government debt, underlining fears that the recent slowdown in its economy may impact the financial sector.

Local governments in China borrowed heavily after the global financial crisis to try to sustain growth rates.

The last audit, published in 2011, showed they had debt of 10.7tn yuan ($1.7tn; £1.1tn) by the end of 2010.

Debt may threaten China's growth, and there are growing fears that local governments may not be able repay…

A large part of the local government borrowings were taken up after the global financial crisis as Chinese authorities released a 4tn yuan fiscal stimulus.

According to the China Banking Regulatory Commission, local governments took up 80% of total bank lending in China at the end of 2010.

Some of the borrowings were spent on infrastructure projects, such as road and rail — seen as vital to sustain orderly economic development — but some of it also went into property construction.

There have long been fears that the projects may not be financially viable in the long run…

At the same time, there have been concerns about the size of total government debt in China, with some arguing that the figures for local government debt have been underestimated.

According to the NAO's last audit, local government debt was around 25% of the China's total gross domestic product (GDP).

But many have said that the levels may be much higher than that.

Mr Kowalczyk said that the concerns about the bad loans in China were serious because "the size of the debt is large and unknown"…