Building Boom in China Stirs Fears of Debt OverloadNote that the New York Times here is telling us that China's system of "government-managed capitalism" has potential weaknesses which could threaten China's economy, "collapse" the real estate market, and cause a run on Chinese banks. This could cause a decade's long recession like that which has happened to Japan, since the peak of the "Rising Sun" economy in the 1980's.
A Lurking Liability
This is the first in a series of articles examining China’s system of government-managed capitalism, and the potential weaknesses that could threaten the nation’s remarkable economic growth.
... there are growing signs that China’s long-running economic boom could be undermined by these building binges, which are financed through heavy borrowing by local governments and clever accounting that masks the true size of the debt.
The danger, experts say, is that China’s municipal governments could already be sitting on huge mountains of hidden debt — a lurking liability that threatens to stunt the nation’s economic growth for years or even decades to come.
For the last decade, as economists have sought to explain China’s rise, a popular image has emerged of Beijing technocrats continually and cannily fine-tuning the nation’s communist-capitalist hybrid. But in fact, city governments often work at odds with Beijing’s aims. And some of Beijing’s own goals and policies can be contradictory.
As a result, China’s state capitalism is much messier, and the economy more vulnerable, than it might look to the outside world.
In the case of Wuhan, a close look at its finances reveals that the city has borrowed tens of billions of dollars from state-run banks. But the loans seldom go directly to the local government. Instead, the borrowing is done by special investment corporations set up by the city — business entities whose debt shows up nowhere on Wuhan’s official financial balance sheet.
Adding to the risk, the collateral for many loans is local land valued at lofty prices that could collapse if China’s real estate bubble burst. Wuhan’s land prices have tripled in the last decade.
The biggest of the separate investment companies set up by the municipal government here is an entity known as Wuhan Urban Construction Investment and Development, created to help finance billions of dollars’ worth of projects, including roadways, bridges and sewage treatment plants.
According to city records, Wuhan U.C.I.D. has 16,000 employees, 25 subsidiaries and $15 billion in assets — including the possibly inflated value of the land itself. But it owes nearly as much, about $14 billion.
“U.C.I.D. is heavily in debt,” a company spokesman, Sun Zhengrong, conceded in an interview. “This may lead to potential problems. So we are trying to make some adjustments.” He declined to elaborate, saying the state company’s finances were “our core secret.”
Dozens of other cities are following a similarly risky script: creating off balance-sheet corporations that are going deeply into debt for showpiece projects, new subway systems, high-speed rail lines and extravagant government office complexes. And they are doing it despite efforts by the central government in Beijing to rein in the excess.
Because all that cash is protected by government restrictions on money flowing in and out of the country, a global run on China’s banks would be unlikely.
The real problem, analysts say, is that municipal government debt in China has begun casting a large shadow over the nation’s growth picture. If instead of investing in growth, China had to start spending money to gird the banks against municipal defaults, some experts see a possibility of China eventually lapsing into a long period of Japan-like stagnation.
A Recession Peril
Kenneth S. Rogoff, a Harvard economics professor and co-author of “This Time Is Different: Eight Centuries of Financial Folly,” has studied China’s boom. He predicts that within a decade China’s lofty property bubble and its mounting debts could cause a regional recession in Asia and stifle growth in the rest of the world.
“With China, you have the ultimate ‘this time is different’ syndrome,” Professor Rogoff said. “Economists say they have huge reserves, they have savings, they’re hard-working people. It’s naïve. You can’t beat the odds forever.”
By Beijing’s estimate, total local government debt amounted to $2.2 trillion last year — a staggering figure, equal to one-third of the nation’s gross domestic product.
Ironically, "Government-managed capitalism" is exactly what Left-leaning Liberals, like those at the New York Times, are always calling for here in the United States.
Why would we want to adopt, as a permanent strategy, the same policies which threaten to topple China's economy?
What a farce.
A "Government-managed" capitalist system is simply another word for a coporate/governmental oligarchy, which gives unearned power to entrenched large corporations, locking out innovators, strangling social/economic mobility, and ultimately inhibiting the freedom of individuals.
As much invective as Liberals hurl at the notion of corporate/governmental oligarchy, the truth is, this is exactly what they want, even as they know it is exactly what will destroy our nation.
In the case of China, I say, good riddance. The sooner China's economic power collapses, the better. A government which crushes dissent, tortures people for their religious and political beliefs, and dictates people's reproductive choices, resulting in 50 million "missing females" (according to a year 1997 report from the World Health Organization) is a government which can not disappear soon enough in my book.