How China Stimulates Growth Matters

Thursday, August 23, 2012 23:05
Posted in category Invest in China

With the recent release of economic data in China pointing towards a larger structural problem, many are wondering what the government will do.  Whether it will go on another bridge building spending spree, if it will release the hounds in the real estate market, or if more rebates promoting consumer demand will be introduced.

Each has its own implication, but in the recent UBS piece Local Stimulus and Property (email me for copy), Wang Tao states in the first coupld of lines:

We have long believed that China’s growth recovery in the second half of this year relies on increased government investment financed by bank credit. But a key assumption behind this is property sector development is stable this year. On that regard, recent rebound in sales and stabilization in prices and investment are generally in line with our expectation…

“Increased government investment financed by bank credit” being the key phrase.

And something Minxin Pei has long warned is going to ultimately slow China’s growth:

Several interesting questions are raised by the revelation of local government debt in China.  First and foremost, it has shown that public finance in China is in much worse shape than previously thought.  On paper, China’s debt to GDP ratio is under 20 percent, making Beijing a paragon of fiscal virtue compared with profligate Western governments.  However, if we factor in various government obligations that are typically counted as public debt, the picture doesn’t look pretty for China. Once local government debts, costs of re-capitalizing state-owned banks, bonds issued by state-owned banks, and railway bonds are included, China’s total debt amounts to 70 to 80 percent of GDP, roughly the level of public debt in the United States and the United Kingdom. Since most of China’s debt has been borrowed in the last decade, China is on an unsustainable trajectory at the current rate of debt accumulation, particularly when economic growth slows down, as it’s expected to do in the coming decade.

The second question to be asked here is whether local governments can service the debts and repay the loans.  If they have made sound infrastructure investments that generate income streams, debt accumulation isn’t a problem.  Unfortunately, that doesn’t appear to be the case for most infrastructure projects built by local governments.  Typically, such projects are highly leveraged, with local governments putting in little equity capital and borrowing nearly all the costs. This makes debt-servicing a huge burden.

And I am still being asked why China’s rich are moving their money out of China….

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One Response to “How China Stimulates Growth Matters”

  1. Jiao says:

    August 29th, 2012 at 9:16 am

    Do you really think that the situation is that bad? There are hosts of reports to the contrary. Surely there are other reasons why China’s rich are moving their money out of the country. Can you send me the UBS piece ‘Local Stimulus and Property’. Thanks