Public Debt in China

In the meantime, the economy must still be directed from above and perhaps also supported by massive injections of public money destined for infrastructures (roads, telecommunications). Over the past four years, these have probably been the country’s largest voice of economic growth, but have imposed an ever-increasing burden on public debt . According to an analysis by F. Giavazzi and R. Dornbush, in 1999 the cost of paying off bank debt and consolidating it into public debt was calculated in a figure corresponding to 25% of GDP. In reality, over the years this percentage has decreased due to the growth of GDP and the reduction of insoluble debts. In light of this trend, it is understood that China does not intend to achieve rapid consolidation of bank debt, but intends to reduce it progressively over the years by letting time and inflation reduce the percentage of bank debt on GDP. Furthermore, in recent years a part of the insoluble debts of the banks has been transferred to some agencies which are in turn providing for the disposal of real estate properties and assets.. In 2000, China’s public debt amounted to 1367 billion yuan out of a GDP of 8818 billion (the percentage increased in subsequent years due to the injections of public funds for infrastructure works). Also in 2000, approximately 480 billion yuan of external debt was added to the internal debt. Added to the insoluble debts of the banks, the total figure would be around 50% of GDP, most likely standing a little below this threshold. Against this debt, tax revenue is generally around 23-24% of GDP. This is the Achilles heel of the Chinese economy, because with low tax revenues the state risks borrowing beyond its repayment capacity. However, this figure should not be overestimated. Italy with a tax revenue of around 40% of GDP must serve a public debt exceeding 100% of GDP, not counting pensions, health care expenses, etc. The problem is not fundamental given the good annual current accounts and the fact that the public debt is largely internal. The proportions in China are even better nor is a thinkable default by the state, which still boasts over $ 200 billion in foreign exchange reserves and strong trade surpluses.

According to Localbusinessexplorer, the question of the use of public money for the economy leads back to the use of credit. Small and medium-sized enterprises that do not have access to bank credit are actually financed through tax evasion and this tax evasion of small and medium-sized enterprises actually allows, as we have seen before, a better use of capital than that of the State or of large public enterprises. A higher taxation on these companies would therefore risk strangling the Chinese economy. Not only that: a large percentage (estimated between 20 and 40% of the total) of foreign direct investments in China, which in 2001 amounted to 46.8 billion dollars, are actually Chinese funds exported and re-imported through Hong Kong. In other words, there is a large part of the non-state economy that travels in a gray area and that has to contribute to the expenses of the state. Otherwise, the state must get rid of bits and pieces of management (construction of roads, power plants, but also hospitals and schools) to lessen its needs. In the first case the tax revenue must grow, in the other the state must enter partnership with private individuals who manage some public services. In both cases, the real problem is that of a major reorganization of the economy, which will allow on the one hand a more systematic and fair taxation and, on the other, the emergence of private individuals who are now semi-submerged.

The legalization of private companies and pensions

In any eventuality, it is necessary to think of a great work of legalization of private companies that have been born and consolidated in recent years, but have not received full guarantees from the law so far. For this purpose, a Civil Code is being drawn up in China, basically drawn up on the model of the Italian one, which in fact fully guarantees private property. This is an important step which would also allow for better management of bank loans and would have positive effects on the entire national economy. However, the debate still remains open because large sections of the country are opposed to an operation that, in fact, would lead to a great wave of privatizations. Opponents are on the left, among the old Marxists opposed to private property, and on the right, among those who do not want to overlook the misdeeds with which many have enriched themselves in recent years. In reality, to suggest this course of action are considerations of simple realism. In fact, much of the state-owned property in China is already privatized, managed more or less badly by local lords. The legalization of this step would clear the field and make the subjects responsible. Today, in fact, many managers keep a company as long as it goes well, while they pass it back to the state if it goes badly. Privatization would make this process impossible and the managers would go to the bottom along with their eventual mismanagement. Beyond the ideological debate, since the last twenty years of Chinese history have shown that Beijing always chooses realism in the end.

The problem of pensions, which arouses some concern abroad, especially considering the current one-child policy, is perhaps the least of all evils. In fact, today only a small percentage of the population has a pension. The peasants never had it and a large part of the urban population, who took their pension from the company they worked for, had it stolen since in many cases these companies have gone bankrupt or are in precarious economic conditions. The government intends to set up pension funds, but so far only 100 million Chinese are covered. Moreover, the profitability of these funds is minimal, since for safety reasons they do not operate on the stock exchange. Over the course of 10-15 years, however, with the maturation of a better class of credit managers, a social safety net should be extended to all of China and entrusted to American-type pension funds, whose profitability will depend on the stock exchange and not on the contributions of a population that the Chinese hope for a decline. In reality, this decline is not occurring, because if in the city people have only one child, in the countryside the norm is three or more. In less than 20 years, internal immigration will lead all this mass to live and produce income in large metropolises, with a process of urbanization that, according to estimates, will affect 600 million people, hitherto remaining on the margins of urban society.

China and the world

China’s problems therefore appear to be sufficiently under control. There remains the danger that Chinese dynamism will devour everything, but perhaps even this risk is seen in an exaggerated way. Here the elements to consider are the foreign exchange reserves which at the end of 2001 were 212 billion dollars in China and around 90 billion dollars in Hong Kong. Beijing is therefore the largest creditor in the world, more than Tokyo, which is hovering around 300 billion dollars. But unlike Tokyo, which has been in crisis for a decade, China has a rapidly growing economy. However, it is very difficult to say how quickly and if and when the longed-for, or feared, economic overtaking will take place.

Today the Chinese economy is about one eighth of the American one, and this constitutes a gap huge, even if smaller than in the past. In other words, even if China quadrupled its GDP in the next 20 years (which means an average growth of 8% per year, a rate higher than the current forecasts which assume a 7 or even a 6%), this would arrive to be half of US GDP, if the US did not grow. But if the US didn’t grow, neither would China. On the other hand, if we estimate that in the next 20 years the American economy will grow by 50 or 100%, to think of a Chinese economic overtaking we must project ourselves on a horizon of at least 40-50 years, a period of time that will hardly be able to pass in a linear way. The prospect of overtaking must therefore be taken with great caution. A different story applies to the relative weight of China in Asia. On the continent, after 1997, China has in fact replaced Japan as an engine of development and in 2001 and 2002 it appeared capable of actively driving the region’s most vibrant economies: Thailand and South Korea (while Taiwan and Hong Kong, already integrated into its economic system, are struggling). This growing importance of the Chinese economy in Asia and the Pacific is perhaps the most important element of this decade, also because in the 1990s in America there was a historical shift of the national economic center from the Atlantic to the Pacific basin.

Europe has so far been a stranger to this reality, focused as it is on its internal issues. However, its distraction could lead to a significant marginalization in international trade and a progressive decline. But on this the focus shifts from Beijing to Brussels.

Public Debt in China

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