China piles on the debt

Once hailed as an economic saviour, China is facing a growing deficit

Can China save the world? At the height of the global economic meltdown, many Americans and Europeans believed it might. China sailed through 2009 with an estimated annualized GDP growth of over nine per cent. In 2010, it posted 10.3 per cent growth, and early this year elbowed out Japan as the world’s second-largest economy. The People’s Republic seemed the economic engine that would pull the West out of its quagmire.

That once-firm belief, though, is starting to crumble. Traders and analysts are wondering whether Beijing isn’t heading for its own housing market bust and massive debt mess. Alarm bells are sounding about the real estate frenzy that’s been filling even smaller Chinese cities with luxury apartments that local income levels likely can’t sustain. In the mainland, bank credit is at 120 per cent of GDP, and in Hong Kong, where borrowing rules are laxer, it stands at 240 per cent, the Financial Times reported. Even more unsettling is the size of local government debt, which an official auditor’s report recently tagged at US$1.6 trillion, or 27 per cent of GDP. The true figure could be even higher, according to Moody’s Investors Service, which said it believes Chinese authorities have failed to account for another US$540 billion of debt.

Much of that red ink, say analysts, is the result of Beijing’s own generous lending policies and the US$586-billion stimulus package that was meant to spare China from the economic crisis. But public coffers have also been pillaged by the government’s own employees, according to a report last week by the Bank of China. It estimated that up to 18,000 corrupt officials and white-collar workers at state-owned enterprises have lifted as much as $123 billion of public money (roughly two per cent of last year’s GDP) since the mid-1990s.

Yet a global economic crisis 2.0, or at least one precipitated by China, seems unlikely. With an economy still growing strongly, Beijing can afford a high debt-to-GDP ratio, and it needn’t worry about owing money to foreigners (like the United States must), as much of its public borrowing is funded by domestic savers. There will undoubtedly be some bumps on the road, but likely not an engine breakdown.