原文标题：China’s $22 trillion time-bomb
For years, a wispy, gossamer dream has been spun by economists working for Wall Street investment banks about how China has managed the impossible: high growth with a very low debt-to-GDP ratio.
The dream has been so aggressively sold that almost everybody believes it, including editors of this newspaper who have written glowingly about China’s growth, how far ahead it is of India, how India should give up this race once and for all and so on.
Like all things churned out by Wall Street, this romantic story is also complete rubbish.
Regardless of the level of education, we all behave the same way when we analyse countries: we land at the airport, see multi-lane highways, gleaming skyscrapers in the city centre, massive infrastructure development, teeming shopping malls, tall apartment blocks and golf courses.
And immediately jump to the conclusion that this country has done it. It has made it.
If you are an Indian, you say this country has left India behind by 100 or 200 years.
But it is instructive to remember what a crafty villain in an old Hindi movie said: “Har badi kaamyabi ke peeche koi gunaah chhupa hai…” (Behind every great success, lies hidden a great crime).
Just as behind nearly every rapid economic growth story, lies hidden, debt.
Usually lots of it. Just like Ireland that went from being a really poor country in the 1980s to getting to the top of European Union’s per capital GDP league tables – all within 20 years or so.
China is no exception.
The common wisdom is that China runs a very low debt-to-GDP ratio of around 30 per cent (this ratio was in the low 20s till 2007 but jumped sharply during the 2008 crisis), which gives it lots of firepower to keep reflating the economy and to keep recapitalising its banks.
The reality is that this ratio is plain wrong. China’s growth model is based on the oldest rapid economic growth hormone available: debt.
China has debt at various levels and pockets. Let’s add to this central debt, the local government and provincial debt figures.
This figure is around $1.9 trillion. Let’s further add the obligations of the Ministry of Railways. That’s $360 billion. And finally let’s also add 80 per cent of outstanding bank credit.
This adds $6.3 trillion. We add bank loans to national debt because unlike most countries, China uses banks for nearly all of its directed, policy lending programmes.
For example, the stimulus of 2008-09 was financed largely by banks. By pushing its lending via the banks’ balance sheets, China creates the impression of a country that has very low budget deficits and, of course, very low central debt.
We take 80 per cent of bank debt into the national debt figures under the assumption that 20 per cent goes towards consumer and private sector credit.
Now let’s total up the few trillions we have unearthed. As of 2011, this figure amounted to a tad over $10 trillion!
And the ratio of total debt to GDP becomes a more ominous 149 per cent.
Mind you, there may be other debts that are obligations of the central government that we don’t know about since reliability of data in China is suspect, to say the least.
It is eminently possible that debt is understated and GDP overstated.
But the story gets worse from hereon. China’s growth model is highly capital or, more accurately, debt intensive.
We have calculated a ratio called DIG (debt intensity of GDP), that is, the amount of debt needed to generate one unit of GDP.
This ratio started out being in the 0.9 to 1.2 range in the first half of the nineties.
During the Asian crisis, this ratio worsened to around two as China again threw loads of debt to come out of the slowdown.
The ratio subsided a bit to below one in the boom years from 2003 to 2007. But it jumped dramatically to over four in 2008 as China threw a huge amount of money at an unprecedented slowdown.
The trouble is that given the overall low growth environment globally and the worsening trade situation for China, generating a unit of GDP growth now requires higher and higher doses of debt.
And, in hindsight, we will look back and say this stimulus of 2008-09 was a colossal mistake.
So what does the DIG ratio lead us to? See the table.
As we can see, each crisis leads to a worsening of the DIG ratio and, concomitantly, a sharp worsening of the total debt-to-GDP ratio as China starts building bridges and roads to nowhere in order to reflate.
The bigger problem lies ahead. Given this inclined treadmill model, if China grows faster, the bigger the debt problem becomes.
For the sake of calculation, let’s assume the DIG ratio goes to 1.7 over the next four years till 2016 and that China wishes to grow at eight per cent.
The total debt-to-GDP ratio at the end of 2016 becomes 180 per cent, up from the 150 per cent of 2011! In absolute terms, China’s total debt will reach $22 trillion.
Coupled with a worsening demographic picture, this high total debt-to-GDP ratio becomes a trap from which there is virtually no escape.
To compound the problem, China’s private consumption expenditure (PCE) to GDP has declined sharply to 33 per cent from 55 per cent 20 years ago.
The ratio of net exports to GDP has fallen to 3.9 per cent in 2010, from 8.8 per cent in 2007.
It’s only the ratio of gross fixed capital formation to GDP that has jumped to over 50 per cent in 2011 from 25 per cent a few years ago.
As is clear, if China has to maintain its pace of growth, it has to pile on more debt. If it slows down, its social powder keg starts getting incendiary.
We are not even counting the burgeoning, widespread non-performing loans problem that is looming large and will, in all probability, lead to China’s fourth systemic banking crisis in less than 25 years.
If this is a growth model, then it is even worse than the Western growth model.
So, the bullets China has in order to emerge from this rock-and-a-hard-place situation are few, if any at all. China is indeed riding the tiger.
In contrast, India’s is the Toyota Prius of growth models. India should simply avoid the trap of excessive public spending on infrastructure.
That’s where almost every country in Asia, including Japan in the nineties to China and Dubai now, has run into problems.
India’s growth model is infinitely more robust and time will prove this to a world bedazzled by China.
Thank g0d for small mercies.
by aus ant (View MyPage) on Mar 03, 2012 11:33 AM
Good India didnt rake up all this debt like china.
At least in China, they have the infrastructure to show for it.
If india had attempted the same, only our netas, babus and entrepreneurs pockets w’d have bulged.
by aus ant (View MyPage) on Mar 03, 2012 11:29 AM
I feel better after reading this.
I was under the impression that india was doing worse than China.
Now i know better.
This author is illiterate and clueless
by David Dak (View MyPage) on Mar 03, 2012 03:58 AM
I have read this article and read every comment up to now. I can see that every commentator is much better than this author to comment China and India’s economy and development issues. I am speechless to this article. It is not worth to write any comment about this article because this author is illiterate and clueless about world economy and affair. He is clueless. I am writing here because of some commentators like piri and Raj Gupta, because of their thoughtful, informative, and logical comments.
Not a precise article
by Arun (View MyPage) on Mar 03, 2012 03:51 AM
You cannot compare India and China in the same scale. Look at the corruption in India today. It would exceed the debt of all countries of the world. With infrastructure development, China turns its spending into assets. So, it would have as much worth of assets as it spends.
But in India, money is stashed in swiss and singapore accounts, economists jus pumping out claims that India will be a super power… but when the whole world economy collapses, USA will be left with roads, rail and air network that can be unbeaten. China’s strides and Europes stalled growth still has great infractural assets with a good knowledge assets. India will be left out with a pathetic network of road, rail and air connections with swollen middle class with cars and match box apartments in the over grown cities and extra large inflation. What we have in India is a temporary manufacturing base that can be shifted any time to any part of the world. Even Tata motors are building Jaguars and Land Rovers in China… not India….
Think about the reality.
The most manipulative article I have ever read
by Nikhil (View MyPage) on Mar 02, 2012 09:00 PM | Hide replies
Every possible figure is skewed to create a particular argument . For any country honestly what matters is external debt, Internal debt can always be adjusted by policy changes . Now look at China’s GDP size to external Debt and India GDP size to external debt . Very easily you will know we are deeper in debt and more mismanaged an economy and the sad part is the wealth distribution in India is far worse than in China which is more important than economic figures
we have a huge section of population that is below poverty and the middle class is fighting the crumbling infrastructure wasting his time travelling everyday in pollution and frustratingly slow public transport .For the rich who live and work close and travel in ac cars life in India may not be bad but a huge realy huge segment of population is living a very poor quality life with hardly any quality time for family in India . Many Indians wont even be realising how much time is this poor infrastructure wasting from their lives it is only after u live abroad for a while u can realise that poor Indians r made to suffer and then people like come and tell them Indian economy is doing great no need to build infrastructure go slow … it the middle class whose life is wasted not yours
Re: The most manipulative article I have ever read
by shubasrikrishna (View MyPage) on Mar 02, 2012 09:14 PM
Very well said.
Iam doing a very business in Tamilnadu, but we still do not have access to Power ( 12 hours power cut), the roads are in shambles and no access to water…
The middle class in China have no such problems.
Most importantly the whole world depends on China for manufactured goods. They increase the prices any multiple of times, the world will have to buy.
The world including India is too lazy to produce, use its resources and the bogus reasons of land availability, pollution and other infrastructure will always depend on China.
Re: Re: The most manipulative article I have ever read
by Nikhil (View MyPage) on Mar 02, 2012 09:21 PM
Yes u r so right , take an example of Tirupur which is in tamilnadu , Indian entrepreneurs struggled so hard to create a textile base and look at the infrastructure of that place till date .Govt,infrastucture and our policies only create more problems in people’s life ,China manufacturers get electricity so cheap as compared to India because they went nuclear long time back and can produce cheap elec.Mr author,stop fooling Indians there r people on this forum who have visited and seen China on ground level maybe u r the one who went only to airports and came back I live here, day in day out i see how they r getting richer and as the person above said even increasing prices and still the world has no choice but to buy from them .
The only 2 conformed debts in this article.
by Raj Gupta (View MyPage) on Mar 03, 2012 12:36 AM
One is China’s local gov’s debts of 10 trillion RMB, or 1.5 trillion US$. Another one is the debt of Ministry of Railways’s US$300 billion. China’s central gov has little debts, maybe be less than US$500 billion. Chinese gov’s debts are different from other countries since Chinese gov is also a big investor, such as MOR.
China’s MOR has a mordern network of 91000km with more than 10000km of high-speed railways. For such as big system, US$300 billion is just a piece of cake. China’s MOR is a money maker, not a money loser today, and MOR adds more than 8000km of new lines in 2010 alone, that’s almost the number that India has added in 65 years after independence, let alone China’s railways have much better quality and are equiped with much more modern technology.
Why are they so many low IQ economists and news writers
by Raj Gupta (View MyPage) on Mar 03, 2012 12:28 AM
Almost all Chinese banks are trading in stock market and big foreign banks and investors hold some shares. Chinese banks are the most profitable banks in the world today and on the top of market value of all banks in the world. Foreign investors know less than this writer? What a pity! We still remember that Indian media claimed Chinese banks were not stable as India’s. But the truth was that ICICI was almost collapsed in 2008 while Chinese banks are stronger and stronger.
by RSSHINDU (View MyPage) on Mar 02, 2012 09:00 PM
Rediff, please do a similar working on Indian debt. At least China has grown rapidly using the debt. Where is India in the global picture. When we say we are an Asian power, we just flatter ourselves. We can not even compare our metros to villages in the European countries or US.
The reason behind all this is corruption. It is prevalent at every level. Unless the entire system is revamped and all the existing rodents thrown out without mercy, India will be what it is now – “A Developing Country with a potential to become a super power” forever.
by Rediffis aHypocrite (View MyPage) on Mar 02, 2012 07:45 PM | Hide replies
ok here’s a silly question. Who is giving money to china’s financial institutions for them to lend it to their govt?
Anyway once infrastucture like roads, power stations, airport, sea ports, R&D centers etc are built by (borrowed) money they generally tend to payoff in the long run as they last atleast for a century if not more. So the argument that a default is imminent or we should not build infra on brrowed money is false as now china can payoff its debt using its infrastucture.
Compare that to India’s growth(or lack of it). The 60-70% money spent on anything and everything is wasted in the form of corruption, misuse, shoddy workmanship, lack of planning, offical stupidity etc. So where is the ROI on this stuff? Besides India’s debt and fiscal deficit is not rosy as well for the author to sneer down on China’s debt problems. Atleast they’ve got something to show for all the money they’ve borrowed and spent! We still have a lot to learn from China economy wise.