Much ado about nothing

West should stop making a fuss as local government debt is at a reasonable level and the risks are under control

China's huge local government debt has become the focus of attention in the West, because a number of local governments have reportedly encountered creditworthiness problems. Some overseas institutions have expressed concern that China will follow in the footsteps of European countries and be plagued by debts that it is unable to repay.

But is China's government debt really spinning out of control?

China's development, as remarkable as it may look from afar, still requires continued and meticulous efforts. Although China has an immense economic aggregate and enjoys rapid development, a rural-urban divide and regional gaps still exist. In addition, its infrastructure, including water conservancy, transportation, environment and public facility management, all require tremendous input. It will take a long time for China to narrow the rural-urban divide and realize regional economic integration, urbanization and industrialization. In this process, it is necessary to keep the investment ratio at a high yet rational level.

A high investment ratio must be backed by adequate funds. Statistics from the International Monetary Fund show that although China's government revenue, including fiscal revenue and government fund revenue, has been growing year-on-year, its share in the GDP is a mere 20 percent, far lower than that of Germany, Italy and France, where it is around 45 percent, and lower than the United States and Japan, where it is 30 percent. The total revenue seems insufficient for such a large country as China with a dual-structure society. However, given China's current development stage and national conditions, it is unrealistic to raise the tax level to 50 percent like Denmark and Sweden. Burdened with a lot of unfunded mandates, local governments rapidly expanded their borrowing through their own financing platforms. These debts are formed under special historical and structural backgrounds. They helped make up shortfalls in fiscal revenue, gave impetus to economic recovery and broke the infrastructure bottleneck. Of course, there is no denying that some local governments have exceeded their borrowing capacity due to the lack of proper supervision and regulation.

But statistics put China's debt total at around 20 trillion yuan. This is about 50 percent of China's GDP, still lower than 60 percent, which is an alert sign in the Maastricht Treaty.

And if we look at debt repayment, we find that 2011 and 2012 are the peak period for local governments to pay off their debts, repayments gradually level off in the following years. The debt due by the end of 2011 is 25 percent of GDP and the debt due in 2012 is 17 percent. And we can estimate that the debt service coverage ratio will decrease to 10 percent after 2013, which means that the risks are not high and there is little chance of triggering a so-called debt crisis.

Therefore, China's debt level is not too high, and on the whole the risks are under control.

Moreover, the problem of local government debt is a result of China's efforts to address the impact of the global financial crisis. The local governments carried out large-scale investment projects in a bid to implement the economic stimulus plan. Thus the debts generated are neither for public welfare as in Europe and the United States, nor for warfare. Rather, the money has been used for the construction of roads, bridges and high-speed railways. This type of input will improve macroeconomic efficiency, and the infrastructure built will benefit generations to come. The development of infrastructure is conducive to China's sustainable development and will bring economic benefits rather than burdens. Therefore, what we now see in China is completely different from the debt crisis in Europe and the United States.

In my view, we should take an objective view of China's local government debt issue and recognize the interdependent relationship between local government debt and economic growth. While making sure that the risks are under control, it is important to create viable channels for local governments to raise funds through financing platforms. By doing so, we can guarantee the normal increase of local infrastructure input and promote China's steady economic growth.

A feasible approach to address the issue would be breaking down the debt risks into a longer period of time for the local governments to tackle the risks. Of course, the precondition for this approach is that the economy grows steadily and local government revenue is sustainable. In October 2011, the Ministry of Finance authorized Shanghai, Zhejiang, Guangdong and Shenzhen to issue local government bonds on a pilot basis. This move represents a breakthrough in handling the local government debt problem.

So why do Western media keep making such a fuss about China's local government debt? Currently both Europe and the United States are facing high unemployment, a debt crisis and sluggish economic growth. And the underlying economic and social problems are likely to be intensified.

It is not the first time that they have tried to shift attention to China and tried to undermine China's economic development by exaggerating problems such as inflation, local government debt and problems in the housing and capital markets. The tactics they are using are similar to those they have used in the past.

In the 1990s, the West tried to make an issue out of the non-performing assets in China's banking sector, claiming that China's banking sector was technically insolvent as the non-performing loan ratio was well above 30 percent. Those institutions that considered Chinese banks to be "technically bankrupt" entered China's banks as "strategic investors" and 10 years later they withdrew with all kinds of excuses after making big profits. This time around their target is China's local government debt. We cannot help asking what is the strategic intention behind their move. This is something we have to guard against.

Han Yu, a Chinese philosopher in the Tang Dynasty (AD 618-907), noted that, "when you are accomplished, others will try to slander you; when you have virtues, others will try to tarnish your fame". In the future, the Chinese model will surely attract both attention and criticism. However, I believe external pressure can be translated into a driving force pushing us to reflect on our deficiencies and shortcomings and promote institutional reform so that we can realize sustainable economic development. Embracing criticism with a tolerant and open mind is the best way to present China's image.

The author is president of the Export-Import Bank of China.

(China Daily 04/25/2012 page8)