China Issues Bond After Bond, As Debt Experts Begin to Worry
By KARBY LEGGETT and KATHY CHEN
Staff Reporters of THE WALL STREET JOURNAL
Is China veering toward a debt crisis?
That is the question a growing number of Chinese debt experts are asking as a new generation of leaders prepares to roll out the country's budget for the coming year. Some officials and economists are questioning the wisdom of continuing to rely on central-government stimulus programs -- funded largely by government-bond sales -- to fuel economic growth. Others are voicing concerns over what they see as the slow pace of reforms of China's debt-ridden banking sector.
"The government has become too deeply involved in things that should be financed by the market," says Yuan Gangming, a senior researcher at the Chinese Academy of Social Science, a government-run think tank in Beijing. "If this continues, of course there will be a financial crisis." Agrees a Ministry of Finance official: "The proactive fiscal policy has brought some negative effects because it has squeezed out the private investor."
And in the article "Will a Financial Crisis Break Out?" the official Beijing Review quotes respected economist Xiao Zhuoji as warning that "increased deficits ... will become a legacy burden on future state finances." In the same article, economist Fan Gang urges that banking reforms should be accelerated to prevent a possible financial crisis.
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While few predict an imminent meltdown, the unusually frank debate underscores the increasing concern in China over the country's growing pile of debt and the longer-term impact of this trend on the health of its financial system -- and on China's rapid rate of economic growth, which topped 8% last year.
China has long grappled with a debt problem among its state-run banks and enterprises. However, only in the past few years has it been facing growing budget deficits, a problem that has in past years plagued the U.S. economy.
Some critics hope that their voices will be heard by the new leadership, which is expected to complete its transition to power and put its stamp of approval on the new budget at the annual meeting of the national legislature in March.
They may be disappointed. Policy makers are expected to propose a 2003 budget featuring a deficit that exceeds 2002's deficit by "several 10 billion yuan," says a government think-tank researcher who is familiar with the plan. The budget plan, which has yet to be finalized and will require approval of the largely rubber-stamp legislature, is expected to include a proposal to issue a similar amount of government bonds as last year, including "special construction bonds," which totaled about 150 billion yuan ($18.1 billion) in 2002, the researcher says.
Ni Hongre, an economist at the State Council's Development Research Center in Beijing, says one reason for Beijing's expected continued reliance on deficits and debt issuance is because 2003 is a peak year for paying back interest and principal on maturing debt. China's new leaders also want to ensure healthy economic growth during this transition year, especially with additional uncertainties caused by the global economic slowdown and a possible U.S.-led war against Iraq.
Since Asia was hit by an economic crisis in the late 1990s, China has relied on an aggressive fiscal spending policy to fund ambitious infrastructure projects that have helped create jobs and fuel economic growth of about 8%. Many projects remain in the pipeline, including a new north-south waterway, dozens of highways and airports, a massive gas pipeline and even a railroad connection to Tibet.
Last year, China's total government-bond issuance reached a record $73.2 billion, or about 6% of gross domestic product, compared with 0.5% just over a decade ago. Beijing's budget deficit has also continued to widen and is forecast to have reached a record $37.3 billion last year, or just over 3% of total economic output, a figure that some say marks the lower end of the danger zone.
Even more alarming for China, says Andy Xie, an economist with Morgan Stanley in Hong Kong, is data that suggests the total value of debt outstanding in China is now equal to nearly 160% of economic output. That figure goes far beyond the 50% to 100% level that many economists consider safe. "Without dramatic changes over the next five years, a major financial crisis may become inevitable," he says in a recent report on the Chinese government's finances.
Besides government debt, China faces growing amounts of other debt. Future social-welfare liabilities, which aren't included in government-debt figures, now total $1 trillion -- almost equal in value to one year's economic output -- according to some estimates. China's big four state-owned banks, which account for the vast majority of all loans in China, are sitting on a pile of nonperforming loans that are almost equal in value to the debt quagmire that Japan's ailing banks are caught up in. Estimates of the debt burden raging through China's banking system range from $450 billion to $500 billion.
Chinese leaders are taking steps to address some of these problems. The People's Bank of China, or central bank, is completing a national, computer-linked database of the credit history of all companies that have borrowed money from Chinese banks, to help banks improve their ability to make smart lending decisions. Regulators last week issued new rules on managing foreign debt.
Ms. Ni of the Development Research Center predicts that Beijing is likely to scale back China's debt issuance and its budget deficit in 2004 if the country's economic situation remains stable. "Our view and the official view is that in the long term, economic growth can't rely on bond issuance," she says.
-- Peter Wonacott contributed to this article.
Write to Karby Leggett at karby.leggett@wsj.com and Kathy Chen at kathy.chen@wsj.com
Updated January 20, 2003 |
