Is China actually bankrupt?

Discussion in 'Economics' started by bearice, Mar 15, 2010.

  1. It seems like a silly question, right? China's foreign-exchange reserves stood at $2.4 trillion at the end of 2009. Yes, China announced that its proposed annual budget for 2010 would produce a record deficit, but the deficit is just $154 billion, or 2.8% of China's gross domestic product. In contrast, the Congressional Budget Office projects the U.S. budget deficit for fiscal 2010 at $1.3 trillion. That's equal to 9.2% of GDP.

    But remember the theme of my column earlier this week: All governments lie about their finances. At worst, as in Greece and the United States, the lies are bold and transparent. Everybody knows the emperor has no clothes, but no one want to say so. At best, as in Canada and China, the lies are more subtle -- more like a magician's misdirection than a viking raider's ax. Look at these great numbers, the lie goes, but don't look at those up my sleeve.

    There's a good argument to be made that if you look at all the numbers, instead of just the ones the budget magicians want you to see, China is indeed broke.

    More debt than meets the eye

    Want to see how that could be?

    If you look only at the current position of China's national government, the country is in great shape. Not only is the current budget deficit at that tiny 2.8% of GDP, but the International Monetary Fund projects the country's accumulated gross debt at just 22% of 2010 GDP. U.S gross debt, by comparison, is projected at 94% of GDP in 2010. The lowest gross-debt-to-GDP figure for any of the Group of Seven developed economies is Canada's 79%.

    But China has a history of taking debt off its books and burying it, which should prompt us to poke and prod its numbers. If we go back to the last time China cooked the national books big time, during the Asian currency crisis of 1997, we can get an idea of where its debt might be hidden now.

    The currency crisis started in 1997 with the collapse of the Thai baht -- and then, like dominoes, the currencies of Indonesia, South Korea, Malaysia and the Philippines collapsed.

    In each case, the country had built up an export-led economy financed by foreign debt. When the hot money that had been flowing in instead flowed out, that sent currencies, stock markets and economies into a nose dive.

    China escaped the first stage of the crisis because the country's tightly controlled currency and stock markets, and its economy, had kept out hot money from overseas. China had built its export-led economy on domestic bank loans instead. The majority of bank loans, then as now, went to state-owned companies -- about 70% of the total, the Congressional Research Service estimated in a 1999 examination of the period.

    Check today's currency exchange rates

    Those loans were all that kept the doors open at many of China's biggest state-owned companies. In its review, the Congressional Research Service estimated that about 75% of China's 100,000 largest state-owned companies lost money and needed bank loans to continue operating.

    That became a problem when, in the aftermath of the currency crisis, China's exports fell. That sent revenue plunging at state-owned companies that were already losing money. Suddenly, China's banks were sitting on billions and billions of debts that anybody who'd taken Bookkeeping 1 in high school could tell were never going to be paid. This was especially a problem for China's biggest banks, all of which had ambitions to raise more capital -- and their international profile -- by going public in Hong Kong and New York. But no bank could go public with this much bad debt on its books.

    What to do? Why not bury the bad debt?

    The Beijing government created special-purpose asset management companies for the four largest state-owned banks, the Industrial and Commercial Bank of China (IDCBY, news, msgs), the Agricultural Bank of China, the Bank of China (BACHY, news, msgs) and China Construction Bank (CICHY, news, msgs). These asset management companies -- China Cinda, China Huarong, China Orient and China Great Wall -- would ultimately wind up buying $287 billion in bad loans from state-owned banks. The majority of those purchases were at book value.

    So how did the asset management companies pay for the purchase of that $287 billion in bad loans? They certainly didn't pay cash. Instead, they issued bonds to the banks in exchange for the bad loans. The bonds, of course, were backed by the promise that the asset management companies would gradually sell off or collect on the bad loans in time to redeem the bonds. And in the meantime, they'd pay the banks interest on those bonds.

    Neat, huh? In one swell foop, the state-owned banks got $287 billion in bad loans off their books and turned deadbeat loans that would never pay off into streams of income from these bonds. To read more on this neat bit of financial engineering, check out this research paper (.pdf file).

    Of course, that still left the little issue of where the asset management companies were going to get the approximately $30 billion in annual interest they had promised to pay the state-owned banks. There was also the small matter of how they were going to pay off these bonds when they came due in 10 years, especially since the cash recovery rate on these bad loans would run at just 20.3% in the first five years
  2. achilles28


    Bankrupt? Hell no.

    China is the best economy to park money, long-term, imo.

    Both public and consumer debt is extremely low.

    PRC debt auctions are there to generate foreign demand for yuan as a USD alternative. They don't need the money !

    China will take a big hit when America implodes. But China will not implode. They've got a huge surplus, tons of room for public and private credit growth, and emerging markets (Chinese middle class, india, brazil, Russia), to sell too.

    They will survive. America - and most of Europe - will not.
  3. The question begged though is:

    how does a couple of hundred billion cause a problem for multiple trillion?

    I don't want to argue with achillies about the ability of China to generate surpluses if America and Europe go belly up and protectionist (hint, the indian middle class won't do it).
  4. achilles28


    There's not much to the article.

    If true, Chinese private debt is 100% of GDP. So what?

    American private debt is 4 *times* GDP.

    Second, none of those loans are guaranteed. The PRC could let a good amount fail and carry the non-performers with the surplus.

    Yea, Chinese real estate/stock is bubblicious and due for a hard correction.

    Still, they're far stronger than the us.

    Look at it this way - assuming all those investment loans went bust (which they didn't, and 2008-2011, is the time they would have), and total debt was 4.8 Trillion, China could make good on half that debt with it's surplus, and still have a public-debt obligation of 50% of GDP, and private sector near 10%.

    That screams growth.
  5. Lethn


    Inb4 American neo-cons screaming that China is a bubble economy and even worse off than ours even though they are buying up tons of precious metals and we owe them trillions of dollars.
  6. In the history of the world, economic prowess has always shifted from older, mature economies to those where labor is plentiful and cheap... and to where the population is young. Today, that's China, India, Latin countries.

    Nothing the "old, mature West" can do about it except cope.
  7. achilles28


    Plus, there's no social entitlement dead-weight on these emerging economies - medicare, social security, welfare, foodstamps etc. That's 100% of US tax revenues, right there. All these handouts are built into costs, effectively pricing the west out of the market.
  8. Does the fact that China is a communist country completely elude you? No social entitlement?

    It's cool to be rah rah rah about China, I know, but that does require not seeing the whole picture. China has been burying debt for decades. They can do that, it is a communist country. A lot of those sweatshop operations are actually running at a net loss, but the Chinese government supports it with loans never to be repaid simply for the purpose of keeping the people employed.
    China is an environmental nightmare and in the not so distant future, it will just be a wasteland. You also may want to look up "death vans", interesting stuff. Their most profitable enterprise is selling organs on the black market, too bad that is a stock symbol you can't buy.
  9. There is no safe place to park money. Any country can go bankrupt anytime. They are all big bubbles and big ponzis.
  10. achilles28


    Traditional notions of Socialism and Communism don't apply to China.

    Where is Government ownership of capital in China?

    Chinese-brand Communism simply means a one party state.

    There's no social or welfare guarantees. There's no voting rights. There's no citizen input over Government policies that could implement entitlement programs/spending.

    It's a Capitalist Dictatorship.

    And I'm no fan of the Communist Chinese. I know all about their death vans and organ harvesting. I'm talking simply from an economic perspective. China is very sound.
    #10     Mar 15, 2010