How China accumulated $28T in debt

http://www.businessinsider.com/china-debt-to-gdp-statistics-2016-1?r=UK&IR=T

by sharetea • 10 years ago

58 74 10 years ago

businessinsider.com

dev1n3• 10 years ago

So now that government debt doesn't look so isolated. China might need its money back, suddenly.

So is this referring to debt that America owes China?

vkou8• 10 years ago

Unlike a loan shark, a holder of government debt can't just ask the debtor to pay up their five year loan yesterday.

dev1n3• 10 years ago

Gotcha. Thanks for the reply. Is it likely China would try and do something crazy like that?

barkingcat• 10 years ago

But they can take their army to a delicate border - say with Pakistan, India, and at the straight, and if they ask North Korea nicely maybe they will be able to get to the SK border, and ask for their money back with the PLA standing by.

A holder of government debt can have much sharper knives than a loan shark.

TheOtherHobbes• 10 years ago

Unless the loan shark is the IMF, the ECB, and the EU, in which case it can park (financial) tanks outside the banks of the debtor country and threaten to rain financial death on it.

That's unlikely to happen in China's case - but we're in novel territory politically and economically, so I think it's impossible for anyone to guess how it will play out.

danielvf4• 10 years ago

TLDR: China has moved from a 170% debt to GDP ratio to a 236% ratio in six years.

For comparison, the US is at a debt to GDP ratio of 270+%.

vkou8• 10 years ago

You're comparing public + private Chinese debt with public US debt.

The public + private US debt/gdp ratio is ~270%.

https://en.wikipedia.org/wiki/Financial_position_of_the_Unit...

toomuchtodo• 10 years ago

Private Chinese debt becomes public if the Chinese government intends to backstop private losses.

danielvf4• 10 years ago

You are correct, I did have the wrong number.

qaq• 10 years ago

US debt is in USD, question is how China's debt is structured.

vkou8• 10 years ago

For context, the US has ~$145T outstanding public and private debt.

https://en.wikipedia.org/wiki/Financial_position_of_the_Unit...

cromwellian• 10 years ago

But it's assets are huge, such that there's a net $128 trillion. The question is, what's the other side of China's balance sheet look like?

AnimalMuppet• 10 years ago

I'm not arguing with you, but... what's the source of that number?

petra• 10 years ago

What would be the implications of this to American or European citizens , if any ?

xyzzy42• 10 years ago

Nothing, for example the United Kingdom has been in debt since the 1600s or 1700s.

static_noise5• 10 years ago

If the Chinese economy suddenly shrinks due to financial troubles, the exports from the EU to China would shrink, too.

China still holds large amounts of US debt. Refinancing US debt might become problematic if the Chinese need to stop lending.

ktRolster4• 10 years ago

Alan Blinder recently estimated that a severe recession in China would have an effect on America of roughly .2% of GDP

gvb• 10 years ago

Unless China follows the playbook laid out by Tom Clancy in Debt of Honor. :-O

Facing an economic crisis, Japan's ruling corporate cabal, led by Yamata, decides to take military action against the U.S. Along with covert support from China and India, they plot to curtail the American presence in the Pacific and re-establish the Greater East Asia Co-Prosperity Sphere.

https://en.wikipedia.org/wiki/Debt_of_Honor

danielvf4• 10 years ago

Both China and Japan have extremely high amounts of debt relative to GDP, and are both are still increasing spending.

Short term, the Chinese stock market will continue to fall - it's still incredibly overvalued from the bubble. US and European stocks should continue to be slightly affected. Anyone with a clue has already priced the Chinese effect into stock prices.

Short and mid term, any money that can will continue to attempt to escape China. Land/Houses/Industries in popular areas may be a little overvalued in the popular places in the US and Europe.

shostack• 10 years ago

So we can expect Bay Area home prices to continue their trend for a bit longer?

maxxxxx• 10 years ago

I have the feeling we would have to bail out a lot of banks.

chvid• 10 years ago

You are seeing implications already with declining commodity prices.

I just read that house prices in Sydney, Australia are dropping month by month for the first time in very very long time.

Probably more things if you look around a bit.

---

I don't think we will see the growth rates in China drop below 5% as the growth is very different from what we have in the west. Essentially it is the rapid modernisation of an economy via strict central governance.

Think about it. Why would the GDP pr person in China be much different from the GDP pr person in Taiwan?

China will continue to have "supernatural" growth for the next many years.

static_noise5• 10 years ago

Debt is a contract. Important questions here:

* Who owes to whom?

* In what currency?

* How could it be enforced?

If China is in debt to China in Chinese currency the Chinese state has very good leverage to handle the situation. It could even make the debt disappear.

cordite• 10 years ago

How does it work when China has bought a ton of US Debt in the past? (Though they apparently sold a bunch last year) [1]

1: http://www.bloomberg.com/news/articles/2015-10-18/china-s-se...

static_noise5• 10 years ago

That probably means that China has no problems paying back debt denominated in US$.

I don't know about the dynamics of this selloff. It's very hard to argue without seeing the whole picture but it indicates that _something_ is going on.

jordanb• 10 years ago

The debt is substantially owed by local Chinese governments, SOEs and developers to Chinese banks.

The central government could:

1) Transfer the debt to itself (a bailout) this leaves the central government with a very high (although sustainable) debt load but doesn't address any of the underlying problems.

2) Inflate the debt away. This doesn't address any of the underlying problems but it also impoverishes a lot of people who thought they were doing well. It also increases capital flight pressure.

3) "Stress test" the banks, requiring loans in arrears be paid, bad loans be written off, stopping the process of sending good money after bad. This is the only move that address the underlying problems, but it means the banks collapse (because they're already insolvent), the SOEs go bust, plus the problem of insolvent local governments would have to be addressed; people lose their old age pensions, massive unemployment. Plus most of the PRC's members wealth is in SOEs so this will affect them personally. Also the government will have to recapitalize the banks if it wants a financial sector at all (see option 2).

4) Claiming to do 3 while actually doing a combination of 1 and 2. This is probably what they will do and if they succeed, at the end of the day, the can will be a little further down the road.

rwmj• 10 years ago

I think you missed:

5) Do nothing about the problem while attempting to hide as much as possible, silencing any whistle-blowers or sources of accurate information.

xyzzy42• 10 years ago

Seems irrelevant because like any country with a sovereign currency they can just print more money if they want to. It's a much bigger problem if you have debt and can't print your way out of it (for example Greece).

ktRolster4• 10 years ago

"Printing your way out" isn't really a solution, either.....Zimbabwe tried that for a while, but gave up after inflation hit 80 billion percent per month.

Prices would literally go up two or three times a day. If you had Zimbabwe dollars, you would try to get rid of them as fast as possible, either by exchanging them on the black market, or by buying something. If you waited until the next day, you would lose a lot of money.

vkou8• 10 years ago

Hyperinflation (Especially unrealiable hyperinflation) is an untenable state of affairs. Nobody lends, hedging is impossible, and cash becomes worthless.

Moderate amounts of inflation (Under 10%), on the other hand, has worked 'fine' for the better part of a century.

Laforet• 10 years ago

Printing money is not the only option, governments can devalue their currency instead and China is already doing it. Greece, of course, has none of these options.

ChuckMcM5• 10 years ago

This is an older article from the beginning the the month as China was really struggling with its stock market. As others have pointed out, debt, in itself, isn't really an "issue" so much as it is money from the future being brought into the present. And when the future has a lot more money than the present does, sending that money into the past isn't a drag on the economy. But when the economy is about the same size in the future as it is now, then that future economy is going to have to figure out how to operate without all that moeny it sent to the past.

For the government debt it isn't a huge issue because the Government can essentially decide not to pay itself back. But for public debt it means that the economy is held back. Imagine if the trillions of dollars corporations in the US are currently holding in "cash" was all going to paying off previous bond holders. That money would not be available for acquisitions or new investment. So those companies would grow slowly or not at all.

static_noise5• 10 years ago

Can you explain the "money from the future" thing?

The only money that I know is a) a metal coin and b) a contract. Now, the contract naturally deals with future expectations as does the stock market. The stock market, however, does not create money. It distributes money.

One problem that arises in this regard is making contracts about money (which is other contracts). When the expectations fail, the contracts fail and if the contract was used to create money, you now have a problem. The money supply ultimately shrinks and the contracts about money start to fail. This is usually the point where the government announces big spending programs to lessen the pain.

You may ask where does the government get that money?

There are two fundamentally different methods.

1) from people who accumulated money. They give it to the government and the government spends it. In turn the government needs more money to pay those people back.

Does the money supply increase this way? Kind of, but not really. It just helps to bring existing money back into circulation but does not create new money. It is therefore only a temporary fix. One day the government will stop paying those people back.

2) The government just creates new money. They can do this if they control the currency (sorry, Greece). The dangerous part about this is that it is so easy to create new money once the dam has been broken and this new money isn't backed up with value. When this goes out of hand it leads to hyperinflation (as in Germany 1920s) where the currency is devalued.

By having a really strong and reasonable government, you can force 1) at low cost and control 2) without going overboard. China might be in a position where they can do that for a long time.

ChuckMcM5• 10 years ago

"Money from the future" is a way of describing using future GDP to pay for current goods. Its a bet that what ever you are using the money for will result in a way to pay it back in the future while still benefiting from the investment.

Simple example: I borrow $50,000 from a bank to open a restaurant.

Lets split that into two bets:

First, I bet that from my future revenue, I'll be able to pay back the bank and keep operating my restaurant. So in my own time line if you will I am taking money I'll be earning from paying customers in the future and using it in the present to actually build my restaurant. The way I do this is with a bank.

Second, the bank kind of believes and kind of doesn't believe that I can pay it back. So it says "we'll take some money we have laying about and give it to you to open a restaurant, but you have to pay it all back to us in 10 years and every year we want an additional 7.2% from you. What that means is that after 10 years you will have paid them back double the amount of money you borrowed.

So I've taken $50,000 of my future revenue, and turned it into a monthly obligation to the bank of $834. So if I sell my pies for $8.34, the first 100 pies of every month end up having all that money going to the bank which loaned me the money. So in my "present" money is going to pay off my "past" borrowing. Had I not taken the loan that $834 would go right into my pocket.

In a Macro Economic sense, if you take on debt, and invest the capital represented by that debt to grow the economy, then in the future the larger economy, some of the GDP is going to servicing (or paying off) that debt rather than additional growth. If your economy cannot sustain that drag (debt service) then it tends to contract, which makes it even less able to support that drag. If you read George Soros he will tell you that any day now the entire world is going to implode in just that fashion :-).

The careful thing you have to watch out for is talking about "money" which everyone thinks of as bills and coins or balances in a bank account, and "GDP" which is essentially the "value" created by all of the economic activity in an economy. Governments try to manage their economy to grow its GDP, and because transactions in the economy are often (but not always!) transacted using the national currency, economic figures are often reported in terms of dollars or yuan or yen or what have you. But you have to remember that you can have an economy that doubles in size, the the size of the monetary denominational transactions might be the same, more (inflation), or less (deflation).

China is in the situation of trying to show the world a growing GDP (their economy). They have a spotty track record when it comes to how accurately they compute that :-) but fundamentally if they cannot actually grow it, then the debt they hold which they created in order to grow, will not be serviceable without shrinking the size of their economy. The traditional "fix" for that is that the exchange rate between economic value and currency changes so that the numbers match. China allows the Yuan to "inflate" to 10x its current value, and then services the debt with this inflated value.

But what that really means is you aren't selling enough pizzas so you start charging $834 per pizza and just by selling one a month you can meet your monthly debt payment. And the citizen says "Gee, remember when you could get a nice pizza for less than $10? I miss those days."

thwarted• 10 years ago

For the government debt it isn't a huge issue because the Government can essentially decide not to pay itself back. But for public debt it means that the economy is held back.

"Public debt" is another name for "Government debt"[0]. From the rest of your description, you means "debt owed by the non-government public", private debt, or "household debt" (which doesn't strictly include corporate debt like your example outlines).

[0] https://en.wikipedia.org/wiki/Government_debt

ChuckMcM5• 10 years ago

Absolutely, I'd edit the post but rather that acknowledge the gaff here. Debt the government owes to itself it has a number of ways to manage, debt between private entities is a much harder thing to fix without tanking the economy. The canonical example these days is the subprime mortgage crisis.

hackaflocka3• 10 years ago

What does "Chinese debt" refer to?

- Debt owed by Chinese citizens?

- Debt owed by companies headquartered in China?

- Debt owed by the Chinese Govt?

What about a Chinese multinational that has offices all over the world, and has incurred debt all over the world? Is all their debt considered as Chinese debt?

ChuckMcM5• 10 years ago

Debt instruments denominated in Yuan (renminbi) [1]

[1] http://www.economist.com/news/business-and-finance/21679341-...

cylinder3• 10 years ago

Debt is always mistakenly discussed when it is more appropriate to discuss debt burden.

gscott2• 10 years ago

China is impervious to any amount of debt and should let it all default right away. Normally if you are heavily in debt say you have a bad credit score, no one will want to lend to you. However if you have a bad credit score and millions of people moving from poverty to the middle class and companies around the world want to sell to them... that is a different story altogether. It is not like there is another market like China available. China is the only growth market available, anywhere. Companies are so desperate to sell in China they have transferred all of their intellectual property to companies inside of China for the privilege even though it will destroy the companies in the long run.

pil4rin• 10 years ago

You wouldn't consider India or many parts of Africa a growth market?

gscott2• 10 years ago

No, right now India doesn't have a growth mindset because of their many laws and probably corruption. Africa is not stable enough for meaningful growth however... China is doing their best to change that and make Africa a growth market for them by working with stable dictators no matter how brutal and terrible they are.

cylinder3• 10 years ago

Michael Pettis explains why China almost certainly has to undergo debt forgiveness, just as pretty much every other heavily indebted nation has, historically: http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-...

coliveira2• 10 years ago

This is probably what China should do, but like any other nation in the world they will not do because of the high political cost. The most likely scenario for China is that they will maintain this debt forever, by constantly devaluing the currency just to let the state-owned companies survive.

pm90• 10 years ago

For a good context on this, I would highly recommend "The Global Minotaur" by Yanis Varoufakis. It really changed my understanding of the use and flow of debt, specifically sovereign and institutional debt.

csense• 10 years ago

This article: "How China accumulated $28 trillion debt in such a short time." At the bottom it says "Now watch: China is immortalizing its founding leader with an enormous 121-foot gold-plated statue."

I guess the second headline answers the first headline's question.

sp332• 10 years ago

Gold plate is cheap.

nness2• 10 years ago

Not symbolically.

elevensies• 10 years ago

This blog post explains why China's debt is a problem: http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-...

From what I understand (something may be getting lost in translation)

- The increasing debt is being used to keep up growth

- The growth that is being bought by the debt isn't enough to service the debt

- Some sector of the economy will have to pay for it, because growth will wither until it is paid.

Quoting: China is also constrained from reducing the debt burden though monetization, financial repression, or taxes on households because in each case the cost is indirectly allocated to the household sector, which simply exacerbates the original imbalance. This leaves only two alternatives. First, Beijing can expropriate the wealth of small and medium enterprises directly or indirectly (in the latter case by raising taxes), although this means undermining the most productive part of the Chinese economy. Second, Beijing can liquidate government assets and use the proceeds to pay down debt. There are no other plausible options.

edit:

also: the process of deciding who gets forced to bear the debt will be highly politicized and contentious. The blog post explains how there are strong negative consequences to each choice.

torpilla• 10 years ago

Debt to whom? Who had 24T to lend to them? How did they make that 24T?

blisterpeanuts• 10 years ago

Damn. I didn't realize their debt was that high.

Interestingly, the U.S. outlook is brighter today than China's, in contrast with a mere couple of years ago when China looked destined to be the dominant economy.

There are a couple of reasons why. The U.S. has enormous energy reserves and will in the long run emerge as the major energy exporter in the world, helping reverse the perennial balance of trade deficit to a surplus, potentially $500 billion to a trillion annually.

Also, Chinese wages are rising even as manufacturing technologies such as 3-D printing and other software-driven approaches are helping bring factories back to the West. The Chinese model of cheap outsourcing is just about tapped out or will be in the next ten years.

ktRolster4• 10 years ago

"Interestingly, the U.S. outlook is brighter today than China's, in contrast with a mere couple of years ago when China looked destined to be the dominant economy."

A lot of it is news hype. Disaster sells stories, a "2% decrease in growth" doesn't. The US wasn't doing badly a few years ago, and China isn't doing all that badly now.

Something to remember when the hype and stories come up in the next few years. We'll all muddle through, just like we always do.

lukewrites• 10 years ago

Here's my anecdote about taxes and finance in China after spending ~5 years working there.

I have a number of friends there who are entrepreneurs/small business owners in China. Over the past few years, they have regularly been "asked" by local government to pre-pay the current year's taxes. One friend has now pre-paid three years' worth of tax after successive approaches by tax authorities. (The conversation went like this: "We need you to pre-pay this year's taxes." "But I already did." "Then you can pre-pay for the coming year.")

How China accumulated $28T in debt

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