http://www.globaltimes.cn/content/999445.shtml?from=singlemessage&isappinstalled=0
There has been a constant debate over whether China is facing a debt crisis, in particular a sovereign debt crisis that is triggered by foreign debt - borrowings from other countries and institutions that are guaranteed by national sovereignty. In this respect, China's traditional virtue of saving instead of borrowing hasn't landed the country in the midst of a sovereign debt crisis. Instead, recent statistics have shown that China's volume of foreign debt is declining.
Meanwhile, internally, China doesn't seem to be confronted with a debt crisis either. China's debt leverage in the household sector and private enterprises is comparatively low, while it has been relatively higher in State-owned enterprises (SOEs). A debt crisis domestically would only occur when the creditor and debtor have lost faith in one another and when the debtor is unable to repay the borrowings, forcing the creditor to resort to legal action. In this regard, since the debtor and creditor behind China's comparatively highly-leveraged SOEs are both State-backed, a debt crisis is unlikely to occur. Different economies are characterized by their various development models, so it wouldn't be wise to mechanically refer to a theory and indiscriminately apply it to a country.
Despite the slim possibility of a debt crisis in China, we should be cautious about other problems that can be triggered by China's debt.
First, a country's debt reflects the degree of the government credit. When a government's capability of comprehensively managing matters is questioned, the government credit will be reduced and there will be an increased possibility of a debt crisis. However, a more capable government doesn't necessarily mean higher government credit. For instance, due to fiscal pressure, some governments have imposed coercive lending or forced currency depreciation, which, instead of boosting market vitality, has led to a reduced market appetite to invest. Those circumstances still could potentially lead to a debt or an economic crisis. In this regard, power should be exercised openly and fairly and markets should become more transparent, which will help maximize the validity of government credit.
At present, China's debt situation still lacks transparency, which is not good for enhancing government credit, strengthening the financial system, or improving the government's capability in debt management. A lack of transparency will also weigh against the warning of fiscal risks, or market communication and stability.
Second, debt is closely related to market efficiency. If a government never raises its debt, it will leave limited room for fiscal measures and create low market efficiency. The issue doesn't lie in whether China faces a debt situation, but how to properly manage the debt so as to bring out its maximum potential when it is raised.
China's local governments face the problem of insufficient infrastructure, but are limited in their funding. Additionally, infrastructure projects are long-term and are concentrated with large investments, but the repayment period for local government debt is usually too short. Meanwhile, local governments lack a sophisticated mechanism to raise debt, and China still lacks a sound regulatory system which could hamper the efficiency of debt utilization and debt management.
Reduced investment efficiency, limited repayment ability, and capital's chase of short-term goals rather than long-term ones, could hamper the real economy in the form of an efficiency crisis. If all these factors lead to a vicious cycle, a systemic crisis could be triggered.
Debt is by its very nature a long-term problem, as it spends future money. Accordingly, debtors must set clear expectations for the factors that might affect payouts and debt repayments in the future.
This is also an issue that involves national budgeting. Currently, China's budget falls short when it comes to medium- to long-term vision without sufficient estimates on payments required for future eldercare and bank debt, among other long-term budgets on the country's balance sheet. Along with the growing size of China's economy and the country's rising international status that stand in contrast to its rapidly aging population, a lack of foresight in budgeting is likely to create latent risks and even weigh on fiscal sustainability.
Additionally, it's important to maintain policy consistency. If the macroeconomic policy at large, or the fiscal and monetary policies are not mutually consistent, with abrupt shifts occurring or severe distortions in implementing the policy, doubts will arise over such inconsistency and deepen debt woes.
The use of appropriate debt financing has become a significant component in testing a government's capacity in the current era. Passing this test requires greater effort in improving transparency of the nation's balance sheet and budgetary compilation, along with an array of reforms aimed at maximizing the benefits of debt financing.
The author is chief economist with China National Gold Group Corporation.（作者万喆是中国黄金集团首席经济学家）