‘China’s debt position is fine, the US debt position is weak and unsustainable’

7th January 2014

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The world is overestimating the risks of government debt in China compared with the US says Jan Dehn, Head of Research at Ashmore.

Dehn points out that China’s National Audit Office (NAO) has completed its root and branch review of Chinese government debt and published its findings.

“The NAO’s report shows that China’s total government debt was 56% of GDP as at mid-2013; local currency debt comprised 33% of GDP and central government debt 23% of GDP. By any standards these are moderate levels of debt, especially taking into account China’s high savings rate, high rates of real GDP growth, and strong asset position” says Dehn in a note released this week.

“Much attention has been focused on the rapid rise in local government debt from 26.7% of GDP in 2010 to 33.2% of GDP in 2013. But the overall level of local government debt remains low both in absolute level terms and also in comparison with developed economies.

Dehn says the much discussed third plenum has also introduced measures to ensure debt stays under control.  These include:

Measures to reduce local government spending

Introducing more sources of tax and dividend income for local governments

Increasing the role for bond markets

Divesting activities to the private sector

Dehn adds: “The real significance of the low overall debt levels in China is that they are inconsistent with the commonly voiced thesis that China is financing over-investment with debt and therefore heading for collapse. The over-investment thesis derives mainly from a view that China consumes too little, but in fact China consumes a great deal more than official reported numbers suggest”.

Dehn contrasts this with US debt.

“To put China’s debt trajectory into context we have also updated our debt sustainability model for the United States using IMF’s 2014 forecasts for the US fiscal position. We find that total US government debt is set to rise to more than 160% of GDP over the same period from just over 100% of GDP today.

“So how sensitive are the debt trajectories in the two countries to changes in the fiscal position, growth rates, and real interest rates? China’s debt situation is sound, sustainable, robust to rising interest rates, and can be improved dramatically with just a modest fiscal adjustment. The United States’ debt situation is weak, unsustainable, is vulnerable to even modest rate increases, and cannot be fixed with just a modest fiscal adjustment”.

He adds: “In conclusion, China’s latest debt numbers are reassuring. China’s debt is sustainable and seen within the context of the reforms recently announced in the Third Plenum, the outlook for China continues to look bright. China and developed economies such as the United States, are worlds apart in terms of their debt profiles. When looking at the hard data it is difficult to escape the conclusion that risks are still massively underestimated in developed economies, such as the United States, and significantly overstated in Emerging Markets, such as China.”

 

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