Michael Pettis at China China Financial Markets comments on China’s debt in a Tweet Thread.
For those interested in China’s debt profile, this article has a lot of information, to which I have added some. According to China’s National Institution for Finance and Development, China’s debt-to-GDP ratio rose 6 percentage points…
https://t.co/Yg1BAbuY3k via @scmpnews— Michael Pettis (@michaelxpettis) May 20, 2020
Thread
- For those interested in China’s debt profile, this article has a lot of information, to which I have added some. According to China’s National Institution for Finance and Development, China’s debt-to-GDP ratio rose 6 percentage points.over 2019 to 245% by the end of the year.
- According to the Institute of International Finance – which includes categories of debt not counted by NIF – China’s debt-to-GDP ratio rose 11 percentage points in 2019 to 310%, and rose a further 7 percentage points this year.during Q1 to 317%.
- As high as these increases are, my own estimates are that either debt-to-GDP measure will rise by at least 12-18 percentage points in 2020.
I would add four additional points. - First, almost everyone agrees that some categories of debt are not fully accounted for in the data, so both numbers are likely to be understated.
- Second, because China’s GDP measure is not comparable to the GDP of other countries, but overstates it on a relative basis (see the essay below), its debt-to-GDP ratio should .be adjusted upwards to make it comparable.
- Third, debt data for any country always excludes financial debt because to the extent that a financial system is solvent, it’s financial assets and financial liabilities can be netted out.
- But because the liabilities of Chinese banks probably exceed the real economic value of their assets, the difference represents a contingent claim on the government that is not included in any of the debt data.
- Finally, unlike most governments, Beijing and local governments have substantial asset positions (real estate and SOEs). These can in principle be used to absorb some of the debt-servicing costs, although to date this has proven politically very difficult.
- China’s foreign debt has risen sharply from $0.55 trillion dollars ten years ago to $2.05 trillion today, according to this article, but at less than 15% of GDP, and equal to 2/3s of visible reserves, I think it is still quite manageable.
Note: I reformatted the thread to keep key ideas in the same numbered point. In doing so, I increased the number of points by one.
Mish
O/T In Spain there is a big mixup occuring where the government has signed a pact to repeal previous centre right work reform law. The pact is with Bildu, a previous pro ETA party I think, and the far left of the coalition is celebrating, the centre left is trying to change a clause in that, the right is against, business associations say it will be a disaster, and few against the left wing coalition see a way to change their hold on power. It is complex there as always, the background of french socialism involved in Spanish politics and ETA having been tolerated over the border is just one of many background currents I am able to think of that spell chaos. Mathew Bennett tries to outline it today, some charts there on economy today also.
On the street protests at left wing handling of the pandemic turned violent. They were calling for resignation of the government, protesting loss of work, and were attacked by left wing agitators it seems.
Plate spinning is a pretty good metaphor for a centralized economy. Until the earthquake hits and the whole think collapses…
So are US and the west any better. Crony capitalist isn’t greatly different from a command and control economy. Surely any fundamental justification of the superiority of capitalism doesn’t include the government being there to save the losers. But every time capitalism fks up it buys some politicians to give it a hand out.
Bwah, debt doesn t really matter, does it, we re all palliative in the same bed these days, aren t we ? In the meantime however, ‘thanks’ to globalisation madness, China has become a, to be feared in all aspects, world power ! And to think that only 30 or 40 years ago they were just a billion of poor rice grinders, now dramatically and exponentially contributing to the further destruction of the planet…. Hey, half the Amazon forest and other pristine wild life regions are being destroyed on their behalf !….Long live globalisation and all its nefarious consequences…..if only we had known before that similar insanity would create the path towards total annihilation at one point….Well, I guess we did and do know but unlimited greed, selfishness and depravity, is in our precious genes , that s the way it is…..
Debt does matter. With high debt levels, banks slow down their lending – but only when transparent commercial circumstances apply. However, what does matter is that returns on stimulus slows down considerably with each stimulus. How much more can each bit of unused infrastructure return to the investor? Diminishing returns are the real problem.one of the ways China increased economic growth is by increasing construction all over the eastern coast. Much of this is sparsely used. Some completely unused.
However, all else considered, at this very moment China is going through a controlled Bankruptcy time. It is controlled by targeting specific ares of industry. Companies are allowed to go bust because they cannot repay their debt. Banks recall their loans to a company , which the company is unable to repay. This method was tried in Mongolia about 8 years ago. At that they were unable to control this. However the method is different… they target specific companies and industries.
Everyone needs to put your war boots on.
There is no other way this shit show ends.
If it’s tomorrow or 18 years from now. It’s going to happen.
China is toast fiscally. There options are run away inflation or war. Run away inflation means a new government. War is the only answer.
While China is may well be toast fiscally, it’s a lot better off than some other place I know…..
If history does indeed follow predictable patterns, the sign to watch out for wrt China being on its last leg, is when they, too, head over to Afghanistan to get their butts kicked by people who still have some basic freedoms left.
So you say 317% and Wikipedia says its 48.4%. So – big difference. There is almost nowhere that says China’s ratio is even near 100%. So – this must be due to the math of the first quarter in which the GDP was essentially almost ZERO – sol this is a misleading article. The debt to GDP will probably normalize back to below 100% in which case it will be substantially lower than the USA’s ratio…just saying…lets put it in context.
Wiki number is national debt, this is total debt.
Scary? Well how about us? Federal Debt: 100% of GDP. Private sector : 190% of GDP. Total so far: 290%. State and municipal? Not sure.
Don’t worry, the US is the bestest. At the very least, we’ll never run to solvency problems since every ounce of debt is denominated in US Dollars which we can and will print to infinity.
Lol – I also missed the “total” part when I first read, or mistook it for national debt, and because I don’t know the mix of government owned what, I confused it through the article…but I know national debt to gdp is never listed that high… so I’m thinking Michael Pettis is about to get kicked out of China… anyway it is total debt after a bit of searching.
Even Lagarde had a poke at US debt to gdp just recently, saying this year EU will be 100% and US 130% … except EU is supposed to be 60% debt to gdp limit…maybe the message was “do you really think 60% counts anymore?”
National debt vs total debt friend
Who cares what their debt to GDP is. None of this debt is going to be paid back anyways. But China is printing and building infrastructure that is not going to disappear when the inevitable debt collapse occurs. Those buildings, factories , High speed rails and roads will be there after the bankruptcy. The costs will be reset lower. Now try to compete with low cost Chinese labor and no cost factories. The US on the otherhand is printing to shore up financial assets while watching their infrastructure crumble.
Basically, the question is : is there good and bad debt? And I think the answer is yes.
I haven’t been to China for awhile, but last time back in 2010, I had a great time visiting the eastern side of the country. Taking the bullet train from Beijing from Shanghai was a pretty good experience. The combined Hong Qiao terminal was in particular very impressive.
China creates money to build surplus infrastructure. Massive solar farms that can’t be used because the grid hasn’t been connected. Unoccupied cities of apartments, industrial parks, empty highways. US creates money to make paper billionaires. Which is more likely to create future wealth.
How do you measure this though ?
I have seen US total debt put at towards 400%, or even towards 2000%
Obligations are debt…are there broad and narrow series ?
“How do you measure this though ?”
You don’t.
You just make stuff up, package it in enough mindless, jargon’y sounding language to allow dumb people to feel less so by mindlessly regurgitating it. Then keep repeating it, enough times that the less than critical and reflective start believing “that’s just how things are, Millie…”
All of so called “empirical” “economics” follow that model. And only that model.
What will happen if China’s foreign debt ever becomes unmanageable?
To me this is more then an economical problem. The rate of economic growth will drop considerably. And remember, in the early years the CCP has said that they needed a minimum of 7% growth every year? This was necessary to constrain any political rebellion. Rebellion has already started in a Hong Kong,Mongolia,XinJiang, and Tibet . Intellentgentisa rebellion has taken a few steps forward. The reason may well be that economic growth has slowed considerably. Hope is dissipating .