Fiscal Policy and Sovereign Debt
Comment on “Fiscal Prudence and Growth Sustainability: An Analysis of China's Public Debts”
Article first published online: 6 DEC 2012
© 2012 The Author. Asian Economic Policy Review © 2012 Japan Center for Economic Research
Asian Economic Policy Review
Volume 7, Issue 2, pages 225–226, December 2012
How to Cite
Tanaka, O. (2012), Comment on “Fiscal Prudence and Growth Sustainability: An Analysis of China's Public Debts”. Asian Economic Policy Review, 7: 225–226. doi: 10.1111/j.1748-3131.2012.01237.x
- Issue published online: 6 DEC 2012
- Article first published online: 6 DEC 2012
This comment focuses on three areas: the pension issue, the problem of nonperforming bank loans, and the local government debt.
- The pension issue. Fan and Lv (2012) clearly state that social pension funds are currently showing a surplus so they are not subject to public debt. This treatment is correct. However, China has set itself the goal of having a 100% pension insurance coverage rate for both urban and rural areas by the end of 2012. If that happens, to estimate the total amount of pensions to be paid to national citizens in the future and to see whether or not the current amount of social pension fund reserves are sufficient for that, it is better to start calculating pension finances as soon as possible. If the current amount of reserves is insufficient, then the deficiency becomes a potential public debt of the citizens in the future. Also, in China, there is the problem that local governments arbitrarily divert insurance premiums that national citizens have saved in their personal pension accounts, so the balance of their personal accounts is in effect zero. This is clearly the public debt of local governments when seen from the viewpoint of the people, and it is necessary to clarify the size of this problem.
- The problem of nonperforming bank loans. Since 1999, four large state-owned commercial banks each established asset management companies. In 2000, these four banks and a development bank transferred 1.4 trillion yuan of bad loans to those asset management companies. Thereafter, a huge amount of these nonperforming loans were transferred back to the four companies. The asset management companies were supposed to be liquidated after 10 years, but they still exist even today. Depending on the actual financial position of these asset management companies and what policy they adopt to finally dispose of the nonperforming loans they hold, the non-performing loans that have been left there for many years could possibly become public debt again. Furthermore, care must be taken with regard to how much of the balance of real estate-related loans will in the future become new nonperforming loans.
- Local government debt. An audit by the National Audit Office (NAO) of the People's Republic of China in 2011 revealed that local governments have public debt amounting to 10.7 trillion yuan. However, this may not be the upper limit of the debt of local government but rather a lower limit. We cannot be sure of the total amount of debt of the local government financing platforms. According to the NAO, the balance of the debt of the local government financing platforms at the end of 2010 was 4.97 trillion yuan. However, according to the China Banking Regulatory Commission, the balance of this debt outstanding at the end of 2010 was 9.1 trillion yuan. Even if this discrepancy is due to differences in the organizations’ definitions of debt or their calculation methods, the difference between the two amounts is too large.
The debt of local government entities below the prefectural level such as townships is not subject to audit. However, a characteristic of the funds of local government bodies in China is that the lower their level, the harder it is for them to secure financial resources. As long as the actual situation of the total debts of townships is not clear, it cannot be said that we have obtained a complete picture regarding local government debt. There is a possibility that the debt of lower level local government bodies may not be paid back in the future.
Furthermore, in Chongqing, there are eight large lending platforms. If these are forced into bankruptcy like the Guangdong International Trust and Investment Corporation, which was liquidated in 1998, there will be a large impact on other platforms. Cautious support from the authorities is desirable.