Claims about China which I had not heard before

I am not vouching for this, but it is worth considering as part of the saga of Austro-Chinese business cycle theory:

…the size of the Government’s debt is vastly understated. Not included in the public debt figures are the liabilities of the local governments, which the Ministry of Finance estimated at $680bn as of the end of 2008. In addition to that, a large part of the loans extended this year (estimated at $350bn) went to finance public infrastructure projects guaranteed by local governments. Furthermore, when the Chinese government bailed out its banking system in 2003, it set up Asset Management Companies that issued bonds to the banks at par for the non-performing loans that were transferred to them. These bonds, worth about $260bn, are explicitly guaranteed by the Ministry of Finance and the Central Bank and sit on the balance sheets of the big four banks. The Chinese government also explicitly guarantees $400bn worth of debt of the three “policy banks”. In total, these off-balance sheet liabilities are equal to $1.7tn, which would bring China’s public debt to GDP ratio up to 62%, a level that is comparable to the Western European average.

Of course guaranteeing a bond is not the same as owing money yourself.


My own opinion of China is that they typify the mercantilist thinking of the 18th century. That said I don't think China is a house of cards, instead I see them as a one party state devoted to maintaining economic growth by hook or crook. In the service of their ideal of staying in power, they have the authority to do pretty much anything needed to keep the engine turning. In a lot of respects their situation is analogous to the US in the 19th century. The difference is that our economic policy was primarily free market, with some government mixed in for things like railroads and canals and indian fighting. In their case they have a large administrative state controlling nearly every aspect of development. They also use their economic power in the service of their foreign policy. Or vice versa.
This can not turn out well for them. As has been argued for many years by free market economists from Smith to Friedman, no government can have perfect information and make the right decisions all the time. Given their huge stash of foreign exchange, they will likely be able to ameliorate whatever disaster comes. But it will come and it will be something that they didn't anticipate.

Silly Chinese. How stupid to guarantee private loans originated by ostensibly private institutions ... oh, wait, never mind.

What would the apples-to-apples comparison with the US be? The municipal bond market is $2.7 trillion according to Roubini, but a large percentage of those are guaranteed by monoline insurers (and then, implicitly, by the Federal government).

Rules of discussing potentially negative news about China:

1. Deflect: if it's got any legs, don't talk about it. Instead, compare it to the United States or the west in general. "Well sure they may not have the resources everyone thought, and may be facing some serious problems in the future but, hey, enough about them, what about those OTHER guys? Huh? What about them? Can't we talk about them?"

2. Whether it has any legs or not, deny it has any legs. China's economic and fiscal future is rosy and trouble-free, and even if they do run into something it'll be relatively minor.

"Of course guaranteeing a bond is not the same as owing money yourself."

No, it's worse, especially if you can't control the events that cause default, and don't possess the assets of the debtor to offset the liability.

"governments are able to engage in accounting chicanery while private firms are held to a much more reasonable standard"

That can't be right! Governments are more accountable to the people than business. And, the ONLY reason, that's right, the ONLY reason business accounting is accountable is because the government requires it. Without government accounting rules, businesses would just lie to their investors and bondholders.

"Without government accounting rules, businesses would just lie to their investors and bondholders."

Governments don't promulgate accounting standards in the US. The history of how this evolved in the early 1900s is pretty interesting. The current standard setter is located at

As to your broader argument that governments are more accountable to their constituents than businesses are to their customers/owners: This has been a longstanding debate among economists and I will not rehash the arguments here. If you are looking for some good counterarguments to your position, I would look to Jeff Friedman/Critical Review and/or Caplan's "Myth of the Rational Voter." Also, google George Stigler or public choice.

Another point is that China's social security system for urban workers is not counted as part of the government budget - neither in terms of outlays or revenues, but no Chinese government would allow widespread failure to pay pensions. Spending is only about 2% of GDP at the moment, but only about half the urban workforce are covered, and spending will increase significantly due to rapid population ageing in the next twenty years. Moreover they have a built in problem that new workers are supposedly contributing to individual accounts, but in a great number of cases these accounts are not real and the money is being used to pay current pensions.

Having said this, this particular website strikes me as on the over-alarmist side. One of the linked posts is to a post about Australia's "massive contingent liabilities" with bank guarantees, but they haven't put in an update to reflect the fact that these are now to be withdrawn at the end of next month.

Comments for this post are closed