China's Growing Debt Raises Alarms
ROBERT SIEGEL, HOST:
The front page headline on today's Financial Times is ominous - "Warning On Out-Of-Control China Debt." It's about an influential figure in Chinese financial circles, the head of a big accounting firm there and his warning follows similar expressions of concern by the International Monetary Fund and by bond rating firms. Simon Rabinovitch of the Financial Times wrote today's story and he joins us now from Beijing. Welcome to the program.
SIMON RABINOVITCH: Thank you.
SIEGEL: And first, who is this figure in question and what debt is he warning about?
RABINOVITCH: Well, his name is Zhang Ke and he's the managing partner of ShineWing, which is one of the biggest local accounting firms. What's unusual about his warning is that people have been warning for a while about a pile up of government debt, especially local government debt in China. But most of those warnings have come from outsiders, as you mentioned, from ratings agencies, from the IMF, from investment bank analysts. It's quite rare to have such a stark warning from a domestic figure such as Zhang Ke.
SIEGEL: And when you say the pileup, how big is the pile of local government debt in China?
RABINOVITCH: Well, the short answer is that nobody really knows. The national accounting office, three years ago, tried to estimate it and they came up with 10.7 trillion RMB as their estimate, which is about 1.6 trillion U.S. dollars; about 20 percent of GDP in current terms, which doesn't sound like an awful lot compared to debt levels in more developed economies like the U.S.
What's concerning is, one, that the debt levels have been very low before the financial crisis, and have increased dramatically since then as they used debt-fueled spending to get out of the crisis. And secondly, most people think that the estimate of 10.7 trillion is actually a low-ball estimate. There's lots of hidden debts in the system. There's lots of bank loans that haven't been properly accounted for, so some people think that the actual level might be twice what the official estimate is.
SIEGEL: Just to clarify here, this pile of debt that we're talking about isn't all of the Chinese national sovereign debt. This is just the debt of the provinces and the counties and the municipalities and other localities that have issued bonds and notes, you're saying.
RABINOVITCH: That's right. These concerns here are primarily focused on the local government debts. If you were to include the central government debts and the debts of the state-owned corporations and the ministry of railways, you would get to something between 50 to 80 percent of GDP.
SIEGEL: How likely do people think is the possibility of a default? And if there was one, who holds all this debt and who would be hurt by a default?
RABINOVITCH: The point about the Chinese financial system is it's a largely closed financial system, so these are not debts held by other countries. The local governments have, by and large, been borrowing from their own local banks. To a smaller extent, they've also been borrowing from creditors through the domestic bond market. So it's domestic debt and that's the reason why a default, in the traditional Western sense of default, is probably not on the table in China.
What they have been doing, as debts have been coming up for repayment - and local governments have been unable to pay them back - is that they have been rolling over the bank loans, or they've been issuing bonds to refinance the bank loans that are coming due.
SIEGEL: Bottom-line, though, it's a very heavily indebted system is what you're saying.
RABINOVITCH: It's a system that is facing increasingly heavy debts. And the problem with the lack of default is that there's not an upfront recognition of what these debts are. Instead, they're rolled over, which means that when credit is issued in the system, instead of going to fund new business activity it goes to plug the holes from existing debts. And so, instead of having a catastrophic default, you instead have a very slow decay.
You know, if you look at the financial crisis in the West, one way of looking at it was that, you know, late 2008 was like a heart attack for the financial system. But by the same token, it was able to repair itself relatively quickly. Whereas China, the level of debt here is slowly building up, and when there are problems they will be problems that will be chronic in nature and could well take the financial system a very long time to sort out.
SIEGEL: Well, Simon Rabinovitch, thank you very much for talking with us.
RABINOVITCH: Thank you.
SIEGEL: Mr. Rabinovitch reports for the Financial Times from Beijing.
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