New evidence indicates China may be Bankrupt
China鈥檚 low debt is one key factor that contributes to the global perception of its strong economic health. The IMF estimates that China鈥檚 accumulated gross debt for 2010 is about 22% of GDP, which seems like a drop in the bucket relative to US gross debt at about 94% of GDP.
However, Jim Jubak presents the case that just like any government, including the US 鈥� and perhaps more than most 鈥� China probably runs its balance sheet through 鈥渂udget magicians鈥� who don鈥檛 want to show you that 鈥淐hina is indeed broke.鈥�
Here鈥檚 his description of one of several issues that he鈥檚 uncovered:
鈥淏y making loans to local companies, local governments could produce thousands of jobs and drive up the value of local enterprises. And by funding commercial and residential construction, they could drive up the price of land. Those results were important to local officials who often profited personally, but they were also essential to the survival of local governments.
鈥淏y law, those units also aren鈥檛 allowed to raise their own taxes for local expenditures. To meet local demands 鈥� and to fulfill the directives issued by Beijing 鈥� local governments are dependent on frequently inadequate revenue transfers from Beijing and what they can collect from such transactions as local real-estate sales.
鈥淪o how much did these investment companies borrow and then lend? Local-government investment companies had a total of $1.7 trillion in outstanding debt at the end of 2009, estimates Victor Shih, an economist at Northwestern University and the author of 鈥楩actions and Finance in China.鈥� That鈥檚 equal to about 35% of China鈥檚 GDP in 2009.
鈥淚n addition, banks have agreed to an additional $1.9 trillion in credit lines for local investment companies that the companies haven鈥檛 yet drawn down, Shih says. Together the debt plus the credit lines come to $3.8 trillion. That鈥檚 roughly equal to 75% of China鈥檚 GDP.
鈥淣one of this, Shih points out, is included in the IMF calculation of China鈥檚 gross-debt-to-GDP figure of 22%. If it were, the number would be closer to 100%.鈥�
One of the main problems with that debt, as Jubak goes on to point out, is that about 25 percent, or $439 billion, will likely go bad.
As mentioned above, this is just one red flag in what appears to be an ongoing habit of Chinese number shuffling. You can read more examples of at MSN Money.
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