BEIJING—New Chinese government figures show its national debt load remains low compared with other major economies. But including the debts of local governments and many parts of the state-owned banking sector, as many economists say is proper, shows the constraints facing Beijing in the fight against inflation, its top economic priority.
China's government debt is mostly held domestically. In contrast, about half of the U.S. federal government's debt is held by China and other foreigners, a source of anxiety among policy makers and the public who fear it makes the U.S. vulnerable to pressure from foreign creditors.
China, meanwhile, sits on foreign-exchange reserves that have grown to $2.85 trillion.
But the official Chinese debt tally doesn't include debt owed by a number of large state-owned entities, local governments and even a central government ministry. Among the debts not counted are those of state-owned policy lenders like China Development Bank and by asset-management companies that hold nonperforming loans from state-owned commercial banks. The official total also excludes debts from local governments and central departments outside the Finance Ministry.
China's railways aren't included either though they are run by a central government ministry. Saturday, China's railways minister said debt incurred by rail companies totals more than $270 billion—which the Finance Ministry would be on the hook for if the railways couldn't pay.
Adding up the official debt data from these other parts of the government as well as from state banks and estimated debt of asset-management companies puts China's total government liabilities at $3.55 trillion, equivalent to 59% of GDP. Some economists who follow the issue say those official data underestimate items like nonperforming loans created by a lending surge over the past two years. Stephen Green, China economist at Standard Chartered Bank, estimates total debt, including contingent liabilities, at 77% of GDP. Arthur Kroeber, managing director of Beijing-based research firm Dragonomics, puts the total debt at 75% of GDP. At a press conference this week, Minister of Finance Xie Xuren didn't directly answer a question about whether debts from other government arms should be considered part of the official total. The ministry's news office didn't respond to a request to comment.
Direct comparisons of the debts of the U.S. and Chinese governments are difficult because the Chinese government plays a much bigger role in its economy, industry and banking system. The gross debt of the U.S. federal government was $13.53 trillion, or 93% of GDP, much higher than China's reported 17%. Excluding debt owed by one arm of the government to another, such as Social Security, the U.S. debt was 62.2%, the highest in half a century. The figures don't include the liabilities of the government to pay retirement and health benefits in the future nor the debts of Fannie Mae and Freddie Mac, the mortgage companies that have been nationalized, nor the debts of state and local governments.
The U.S. federal government isn't legally liable for the debts of state and local governments, though there is persistent speculation that Washington would bail them out if they ran into trouble. If China's local governments can't pay their debts, the central government will either have to bail them out directly, or take losses in the state-owned banking system.
Analysts don't think China is on the verge of a debt crisis. Tax revenue is rising quickly, the state has considerable assets, and almost all of its debt is denominated in domestic currency. Unlike Greece, which faces low growth rates and high borrowing costs—the yield on 10-year Greek government debt is currently more than 12%—China's economy is expected to continue growing by near double-digit rates, and its 10-year bonds trade at a yield of 3.94%. But a larger debt burden than widely understood does point to growing constraints on Beijing's policies and also reflects a wider difficulty with the opacity of China's official data that makes it difficult to understand the world's second-biggest economy.
A crucial piece of the debt puzzle is held by local governments. In theory, provincial and city-level administrations aren't allowed to borrow. In practice, officials have found ways around the restrictions. The true level of China's local government debt is unclear. In his report to the National People's Congress on Saturday, Premier Wen Jiabao promised a full audit.
The China Banking Regulatory Commission estimates that investment vehicles backed by local government guarantees borrowed $1.17 trillion over the course of 2009 and the first half of 2010. An article this week in Century Weekly, a leading Chinese financial magazine, puts the total for local government debt at the end of 2010 at $1.52 trillion.
"The alarming thing is that no one, not even the central government, knows how much debt there is in the system," says Victor Shih, a professor at Northwestern University who has studied the issue.
Consumer prices in January rose 4.9% from a year earlier. The central bank has raised interest rates three times since October to combat inflation. But Zhang Ming, a senior researcher at the Chinese Academy of Social Science, says the debt burden limits the room for maneuver on monetary policy. "Every increase in interest rates increases the burden on local government debtors, and that weighs into the central bank's decision making on raising rates," he said.
At the end of 2010, total outstanding debt issued by China Development Bank and other policy banks—which play an important role in funding public infrastructure projects—was equal to $785 billion. The policy banks are able to raise funds at rates only slightly higher than the Finance Ministry, underlining the market view that their borrowing is government-backed.
Beijing also faces potential liabilities from the government's role in the banking system. Mr. Shih estimates that undigested obligations in the asset-management companies that took on the banks' nonperforming loans add $228 billion to the government's contingent liabilities. The China Banking Regulatory Commission no longer publishes data on the asset-management companies' resolution of the nonperforming loans they acquired, but one consultant involved in the nonperforming loan market confirmed that Mr. Shih's estimate was reasonable.
—David Wessel in Washington contributed to this article.
Agence France-Presse/Getty Images
A worker does construction at a railway site in Suining in southwest China's Sichuan province this month.In a report issued during the annual session of the National People's Congress, China's legislature, the Ministry of Finance said central government debt at the end of 2010 was $1.03 trillion. That number is equal to about 17% of China's gross domestic product, far below the levels of the U.S., Japan, and major European countries.
China, meanwhile, sits on foreign-exchange reserves that have grown to $2.85 trillion.
But the official Chinese debt tally doesn't include debt owed by a number of large state-owned entities, local governments and even a central government ministry. Among the debts not counted are those of state-owned policy lenders like China Development Bank and by asset-management companies that hold nonperforming loans from state-owned commercial banks. The official total also excludes debts from local governments and central departments outside the Finance Ministry.
China's railways aren't included either though they are run by a central government ministry. Saturday, China's railways minister said debt incurred by rail companies totals more than $270 billion—which the Finance Ministry would be on the hook for if the railways couldn't pay.
Adding up the official debt data from these other parts of the government as well as from state banks and estimated debt of asset-management companies puts China's total government liabilities at $3.55 trillion, equivalent to 59% of GDP. Some economists who follow the issue say those official data underestimate items like nonperforming loans created by a lending surge over the past two years. Stephen Green, China economist at Standard Chartered Bank, estimates total debt, including contingent liabilities, at 77% of GDP. Arthur Kroeber, managing director of Beijing-based research firm Dragonomics, puts the total debt at 75% of GDP. Direct comparisons of the debts of the U.S. and Chinese governments are difficult because the Chinese government plays a much bigger role in its economy, industry and banking system. The gross debt of the U.S. federal government was $13.53 trillion, or 93% of GDP, much higher than China's reported 17%. Excluding debt owed by one arm of the government to another, such as Social Security, the U.S. debt was 62.2%, the highest in half a century. The figures don't include the liabilities of the government to pay retirement and health benefits in the future nor the debts of Fannie Mae and Freddie Mac, the mortgage companies that have been nationalized, nor the debts of state and local governments.
The U.S. federal government isn't legally liable for the debts of state and local governments, though there is persistent speculation that Washington would bail them out if they ran into trouble. If China's local governments can't pay their debts, the central government will either have to bail them out directly, or take losses in the state-owned banking system.
Analysts don't think China is on the verge of a debt crisis. Tax revenue is rising quickly, the state has considerable assets, and almost all of its debt is denominated in domestic currency. Unlike Greece, which faces low growth rates and high borrowing costs—the yield on 10-year Greek government debt is currently more than 12%—China's economy is expected to continue growing by near double-digit rates, and its 10-year bonds trade at a yield of 3.94%. But a larger debt burden than widely understood does point to growing constraints on Beijing's policies and also reflects a wider difficulty with the opacity of China's official data that makes it difficult to understand the world's second-biggest economy.
A crucial piece of the debt puzzle is held by local governments. In theory, provincial and city-level administrations aren't allowed to borrow. In practice, officials have found ways around the restrictions. The true level of China's local government debt is unclear. In his report to the National People's Congress on Saturday, Premier Wen Jiabao promised a full audit.
The China Banking Regulatory Commission estimates that investment vehicles backed by local government guarantees borrowed $1.17 trillion over the course of 2009 and the first half of 2010. An article this week in Century Weekly, a leading Chinese financial magazine, puts the total for local government debt at the end of 2010 at $1.52 trillion.
"The alarming thing is that no one, not even the central government, knows how much debt there is in the system," says Victor Shih, a professor at Northwestern University who has studied the issue.
Consumer prices in January rose 4.9% from a year earlier. The central bank has raised interest rates three times since October to combat inflation. But Zhang Ming, a senior researcher at the Chinese Academy of Social Science, says the debt burden limits the room for maneuver on monetary policy. "Every increase in interest rates increases the burden on local government debtors, and that weighs into the central bank's decision making on raising rates," he said.
At the end of 2010, total outstanding debt issued by China Development Bank and other policy banks—which play an important role in funding public infrastructure projects—was equal to $785 billion. The policy banks are able to raise funds at rates only slightly higher than the Finance Ministry, underlining the market view that their borrowing is government-backed.
Beijing also faces potential liabilities from the government's role in the banking system. Mr. Shih estimates that undigested obligations in the asset-management companies that took on the banks' nonperforming loans add $228 billion to the government's contingent liabilities. The China Banking Regulatory Commission no longer publishes data on the asset-management companies' resolution of the nonperforming loans they acquired, but one consultant involved in the nonperforming loan market confirmed that Mr. Shih's estimate was reasonable.
—David Wessel in Washington contributed to this article.
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