How High is China’s Official Debt?

With the news that China’s State Council ordered a national audit of all government debt, The Wall Street Journal’s Richard Silk collated research estimates about where the official figure is today:

China has one big advantage over neighbors like South Korea and Indonesia that were laid low by the Asian Financial Crisis in 1997 – almost none of that debt is denominated to foreign currency, or owed to foreigners. That means a Greek-style public debt crisis is hard to imagine, according to Andrew Batson of Dragonomics, a Beijing-based research firm. Instead, the risk is that the government will be tempted either to allow higher inflation to eat away at the value of its debt, or else to keep the financial system highly regulated and prop up weak borrowers indefinitely – pushing down efficiency across the economy and leading towards stagnation.

At 60%, Dragonomics’ estimate for total public debt is in the middle of the pack.

Apart from 8 trillion yuan of sovereign bonds, there could be almost 20 trillion yuan of local government debt out there, according to Standard Chartered’s numbers. Most of China’s provinces, cities and counties are technically not allowed to borrow, but in the two years after Lehman Brothers the central government turned a blind eye as they set up investment vehicles to take out loans on their behalf, mostly to pay for an epic infrastructure splurge. That kept China motoring on through the crisis, but it also left city halls staring at a hefty bill.

The last NAO audit found 10.7 trillion of local government debt as of the end of 2010, and analysts expect a significant jump this time around. [Source]

Absent from Silk’s comparison is Bank of America, where economists think local government debt is still at a manageable level. From CNBC’s Katie Holliday:

According to economists at the bank, China’s local government debt, which is estimated to be around 15-16 trillion renminbi (RMB) ($2.5-2.6 trillion) as of the end of 2012, still stands at a very low debt-to-GDP ratio of 30 percent.

When combined with the central government debt, China’s total debt still measures 50 percent of GDP, which BoFA describes as a relatively healthy position compared to other highly leveraged economies like the U.S. and Japan, which have debt to GDP ratios of around 100 percent and 175 percent, respectively.

In addition, its central bank’s cash savings, equivalent to 6 percent of GDP, places the central bank in strong position to weather any shocks, said the bank. [Source]

Meanwhile, Bloomberg’s Adam Minter explores which Chinese city will become the next Detroit.

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