Adam Levy
2/16/13
PA 315

TITLE: “For China, Spending Is Harder Than It Looks”
SOURCE: The Wall Street Journal
AUTHOR: Liyan Qi and Aaron Back
DATE: 2/12/13

SUMMARY:
Some economists say that the fiscal position of China, the world’s second largest economy, isn’t as strong as it looks. The concern is that China’s debt does not take into account its weak local government finances, bad loans in its banking system, and the future costs of an aging population. This means that if China wishes to offer tax cuts and boost spending, they have less room than imagined.
Nearly all tax revenue in China goes to the central government, so local governments such as provinces and townships rely on fiscal transfers from Beijing, as well as independent revenue sources such as land sales, which can be unreliable. This gives them a strong incentive to continue borrowing massive amounts of money from state-owned banks and private trusts, debts for which the central government could ultimately be responsible if they turn bad.
Local governments depend on land sale proceeds which count for around 25% of their revenue. Last year official data showed that this declined by 14% nationwide due to a central-government campaign to hold down property prices. Local governments' revenue and debt challenges come as China seeks to narrow income and promote urbanization. These are priorities that will require huge outlays in areas such as health care, education and urban infrastructure over the coming years. Things China isn’t accounting for.
Andrew Batson, an analyst at research firm GaveKal Dragonomics says, “In the past, the central government has pushed responsibility for funding such priorities on local governments and state banks, a way to meet its conservative debt and deficit targets. But in coming years, the central government may have to pick up more of the tab.”
Estimates of the true size of China's public debt vary widely. The official figure of China's public debt, as reported by the IMF based on Chinese government data, was 22% of GDP by the end of 2012. Analysts agree that other liabilities should be added to this total, given that the central government ultimately is on the hook for local government debt. But there is little publicly available data on the full extent of such debts, much of it issued by financing vehicles set up by local governments to get around borrowing restrictions. The state auditing agency estimated that at the end of 2010, China's total local government debt was around 10.7 trillion yuan, which corresponds to around 21% of 2012 GDP.
Standard Chartered economist Stephen Green estimates that the true level of Chinese public debt is around 58% of GDP, including debt issued by local governments, by government-controlled policy banks like China Development Bank, and by the Railway Ministry. Even this figure may underestimate the true extent of local government debt since some local-government financing vehicles are disguised as ordinary commercial enterprises, complicating the accounting further.
Yang Zhiyong, a researcher with the Chinese Academy of Social Sciences says that “amid the government's "one-child" policy, the country's working population declined for the first time last year. Spending on the elderly will likely surge ahead in the near future, this will have a tremendous impact on the government’s fiscal position.”
DISCUSSION TOPICS: * On paper, China’s financial problems don’t look anywhere near the US’s and its deficit as a share of gross domestic product are well below the average norm. However, private sector economists say that China’s conservative fiscal approach is stalling growth. That being said, they are urging them to increase spending or lowering taxes in order to shift its economy more towards domestic demand.

* The more cautious the central government's policy the better, since it helps to prevent the overall debt burden from rising

* Economists argue that China’s GDP is all a guessing game now. Instead of keeping it all in the dark, why can't the government put it out under the sun and tell everybody exactly how much it is?