New evidence indicates China may be Bankrupt

Some suggest that China doctors its balance sheets to present a rosier picture of its economic health.

Liu Jin/AFP Photo/Newscom
Zhou Xiaochuan (r.), governor of the People’s Bank of China, answers a question as Chinese Finance Minister Xie Xuren (2nd r.), Zhang Ping (2nd l.), director of the National Development and Reform Commission and Commerce Minister Chen Deming (l.) attend a press conference at the National People's Congress inside the Great Hall of the People in Beijing on March 6, 2010. China predicted another year of rapid expansion in 2010 but pledged to ensure the benefits of economic growth are shared more evenly, as concern mounts over a widening rich-poor divide.

China’s low debt is one key factor that contributes to the global perception of its strong economic health. The IMF estimates that China’s accumulated gross debt for 2010 is about 22% of GDP, which seems like a drop in the bucket relative to US gross debt at about 94% of GDP.

However, Jim Jubak presents the case that just like any government, including the US — and perhaps more than most — China probably runs its balance sheet through “budget magicians” who don’t want to show you that “China is indeed broke.”

Here’s his description of one of several issues that he’s uncovered:

“By making loans to local companies, local governments could produce thousands of jobs and drive up the value of local enterprises. And by funding commercial and residential construction, they could drive up the price of land. Those results were important to local officials who often profited personally, but they were also essential to the survival of local governments.

“By law, those units also aren’t allowed to raise their own taxes for local expenditures. To meet local demands — and to fulfill the directives issued by Beijing — local governments are dependent on frequently inadequate revenue transfers from Beijing and what they can collect from such transactions as local real-estate sales.

“So how much did these investment companies borrow and then lend? Local-government investment companies had a total of $1.7 trillion in outstanding debt at the end of 2009, estimates Victor Shih, an economist at Northwestern University and the author of ‘Factions and Finance in China.’ That’s equal to about 35% of China’s GDP in 2009.

“In addition, banks have agreed to an additional $1.9 trillion in credit lines for local investment companies that the companies haven’t yet drawn down, Shih says. Together the debt plus the credit lines come to $3.8 trillion. That’s roughly equal to 75% of China’s GDP.

“None of this, Shih points out, is included in the IMF calculation of China’s gross-debt-to-GDP figure of 22%. If it were, the number would be closer to 100%.”

One of the main problems with that debt, as Jubak goes on to point out, is that about 25 percent, or $439 billion, will likely go bad.

As mentioned above, this is just one red flag in what appears to be an ongoing habit of Chinese number shuffling. You can read more examples of China’s potential debt cover-ups at MSN Money.

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