Guest Post: China's Ticking Debt Bomb

[Serpo]

Confused about what recent revelations of massive holdings of debt at the local Chinese government level mean for the economy? Even more confused by why Moody's decided to warn about this in a formal ratings announcement? Is there more here than meets the eye, and is the market, as usual, underestimating the impact of this discovery? The Diplomat's Minxin Pei explains why this is nothing short of a ticking timebomb that requires a wholesale reevaluation of China's viability: "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."
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