09 August 2011

China's Inscrutable Debt Problem: Worse than Portugal?

The depth of China's debt problem is impossible to fathom. China's balance books are made intentionally inscrutable so as to allow the CCP to make almost any economic claims it wishes. But what is the truth, and why does the truth matter in the case of China's debt?
China’s own system is jammed with rotten debt held in off-balance sheet state enterprises. Its countryside is littered with eerie, empty ghost towns. And Moody’s Investors Service says last month that China’s local debt was understated by hundreds of billions of dollars.

Despite that, the People's Daily said S&P’s downgrade of the U.S.'s credit rating "sounded the alarm bell for the dollar-denominated global monetary system.” China owns an estimated $1.16 trillion in U.S. debt. China prints yuan to hold down its value so as to keep its exports dirt cheap. It then uses that extra printed currency to buy U.S. debt.

Here are estimates to keep handy as this debate rolls along:

*China’s debt-to-GDP higher than Portugal’s ratio: China likes to say its debt-to-GDP ratio is 17%. Not so fast. The respected Beijing-based research firm Dragonomics says it is 89% of GDP, worse than Portugal’s 83% of GDP, and the U.S.’s 79% by 2015. Stephen Green, China economist at Standard Chartered Bank, figures China’s total debt, including contingent liabilities, is 77% of GDP. China’s balance sheet is notoriously murky.

*China's local government debt understated: It may be 3.5 trillion yuan ($540 billion), bigger than its state auditor has estimated, Moody's said last month.

Moody's said it discovered more potential loans after it found discrepancies in figures given to it by Chinese authorities. China's central bank alone holds an estimated $1.16 trillion in debt, and the government has already increased credit in the system to a reported 200% of GDP.... _Elizabeth MacDonald
The leadership of the CCP is heavily invested in dysfunctional state-owned enterprises, and badly overextended regional banks. China's environmental collapse -- poisoned rivers, air, soil, food, consumer suplies etc -- lead to popular protest and demoralisation.

China's leaders must constantly be on guard against popular unrest and the threat of political schisms that might develop into fullscale insurrection. The popular perception of China as a stable nation -- politically and economically -- must be maintained at all costs, else all is lost for the monolithic dictatorship.

Previously published at abu al-fin

Things could get very ugly in China's economy, and global commodities markets could suffer as a result

Europe needs very little encouragement to rip itself apart at the seams


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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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