Liabilities add pressure on future – Victor Shih

Victor Shih by Fantake via Flickr

Political scientist Victor Shih is only halfway through a project finding out how huge China’s financial rescue package has actually been, but he is already worried. Not that China’s collapse is imminent, but the country has invested a far larger percentage of its GDP into saving the economy, compared to other countries. In his weblog:

it would be mistaken to argue that China accomplished 9% growth without getting into massive debt. In fact, it got into much more de facto public debt as a share of GDP than the US or Europe did. If Cpolers remember a conversation about the rise of deficit this year in China, which put official debt this year at a modest 25% of GDP. However, the reason growth is so high this year is due mainly to investment. In addition to the 4 trln RMB central government package, local governments also rolled out additional trillions in investment projects. In OECD countries, much of these projects will be financed through the official budget, but in China, local governments set up urban development companies to raise this money as “corporate loans” from banks. Thus, around 70-80% of this trillions in investment was financed through bank loans.

Now, local government have taken the opportunity to roll out massive new infrastructural projects, that might require more investments in the years to come, Shih argues:

Does this mean a collapse? certainly not necessarily as the government holds a lot of assets. However, as with any country, we should also pay attention to the liabilities.

Commercial
Victor Shih is a speaker at the China Speakers Bureau. Do you need his insights at your conference or other meeting? Do let us know.