When professor Victor Shih published earlier this year his assessment on the amount of debt China’s local governments had built up while trying to outspend the economic crisis (1.6 trillion US dollar), and predicted a possible crisis in 2012, it was quiet for a while. But shortly after that criticism swelled, telling Shih his assessment was too low, too high or sloppy in any case.
Victor Shih took the Easter break to good use and now comes back to answer his critics on his weblog. Apart from detailed rebuttals, his weblog also deal with the ability of the Chinese government to deal with that amount of debts:
Beyond critizing my estimate, some investment bank reports also argue that whatever the debt amount, the Chinese government is fully capable of addressing this issue and in heading off a financial crisis. On this point, I mainly agree with my colleagues, but I still don’t think the problem is trivial, especially in light that local governments seem determined to take on trillions in additional debt in the coming two years to finance ambitious investment plans. My main worry is that unless Beijing decisively restricts local investment projects, local investment companies will continue to borrow in large quantities in the coming two years.
He agrees China’s government has enough assets to offset almost any amount of debt, only it has not a good track record in using these assets:
Finally, some investment bank reports suggest that the enormous sum of state assets must be considered along side of the debt. If debt ever becomes a problem, the Chinese government can always sell state assets to repay the debt. Here, I am in complete agreement with my colleagues. It will be a great day when the Chinese government decides to privatize trillions in state assets to raise money to repay local debt. The record of the Chinese government in privatization, however, is spotty at best.
Victor Shih is also a speaker at the China Speakers Bureau. When you need him at your conference, do get in touch.