So I want to write a brief follow up to my piece from BloombergViews on Chinese debt levels. I am kind of on vacation, this will not be a long piece but will address some key questions and data will be provided at the end which you can check yourself if you want. As usual, start there and finish here.
I want to start by apologizing for a citation that was brought to my attention by Simon Cox and Bert Hofman that is in an important way inaccurate. I cited the International Monetary Fund World Economic Outlook dataset as China central government having 46.8% debt to GDP ratio. This is incorrect as it covers all government debt according to the IMF and for that I apologize as I make every effort to faithfully and accurate present data.
I believe however, it is very important to explain how this mistake was made, how the IMF data is flawed, and more importantly why the basic premise stands in its entirety. When I write and even when I just study various aspects of the Chinese economy, I am combing through a variety of different data. However, when I write I try to distill what I have learned and cite the most well known data sets or widely accepted data sources. Prior to having written this piece, I had combed through lots of data, which I will get to shortly, and rather than go through less well known data sources and explain how I arrived at figures, I used the IMF WEO data as a headline number to present the point. The IMF WEO data was the wrong figure to use as it shared, as you will see, some important characteristics with the underlying data. Let me emphasize there was no intention mislead, as you will see I have no need to, and I was only trying to simplify by using a widely recognized and accepted data source.
Let me now explain how the error was arrived at. It is possible to access a list of both central government and local government bonds which have been issued in the Chinese market. These are publicly listed bonds with accompanying data on a large number of important variables like face value and maturity date. Importantly for our purposes, we can distinguish between bonds issues by the central government and local governments.
The amount of bonds issued by the Chinese Ministry of Finance totals 25,214,898,000,000 or 25.2 trillion RMB. The amount of bonds issues by local governments totals 23,436,491,110,000 or 23.4 trillion RMB. Together Chinese government bonds from all levels equal 48,651,389,110,000 or 48.7 trillion RMB.
According to the National Bureau of Statistics in China, nominal GDP at the end of 2015 was 68,550,580,000,000. If we use that as our base, the total amount of government bonds in China would yield a debt to GDP ratio of 71%. The level of central government bonds outstanding imply a debt to GDP ratio of 37% or more than twice the official IMF rate central government debt to GDP of 16%.
There are two important points to remember. First, this is only the publicly listed debt. Given the bank loan for bond swap program in China right now, this likely omits a large number of local government bank loans. Second, remember the IMF lists the debt to GDP ratio as 46.8% for “general” government debt. This is rather different from what we know about the debt to GDP ratio with just bonds much less bank loans and other liabilities like guarantees. The discrepancy between the IMF debt to GDP ratio and the public debts to GDP of China is large.
To sum up this problem: the underlying data shows gross explicit government liabilities of at least 71% of GDP and given what we known about privately held explicit public liabilities, an outstanding debt to GDP ratio of 90% is by no means excessive given the announced increase in bond debt swaps to reduce bank loans outstanding. It is worth emphasizing, this relies on just official data and does not use any complex statistical techniques beyond what anyone could do in Excel. To provide some perspective, if we assume official payables aging from Chinese government of the national average, this alone would raise debt to GDP to nearly 90%. Finally, it is worth noting, that even the IMF and Goldman Sachs have measures, from 10-15%, of implied fiscal deficits that are much higher than the official numbers.
One final points. This empirical discussion omits the slightly more philosophical discussion of what constitutes public debt in China. Despite what textbook finance teaches you, investors in China believe every state owned enterprise is backed by the state. Leaving aside whether they are or whether the state should back them, it is clear the Chinese governments at all levels are afraid to let this assumption vanish. Even leaving aside legal obligations, this essentially transfers the vast majority of Chinese corporate debt onto the public balance sheet. Chinese governments have mastered the art of outsourcing their never ending stimulus programs to coal and construction firms, just to name a few. Consequently, even leaving aside the elevated explicit liabilities, virtually every major firm in China is treated in China as state backed by investors.
I do apologize for using an inaccurate data citation as it is never my intent to present a complete and accurate data picture. The data in China is such that I don’t need to embellish as it is problematic enough on its own. However, as I believe one can easily see, Chinese debt levels that we can verify right now, are significantly elevated above the official data closely matching the data citation I presented. The underlying data supports the general point and numbers I present. I
It is clear that official outstanding debt numbers much like GDP and a variety of other data simply do not match the headline data.
For interested parties, here is the list of outstanding bonds and GDP data which I present here.