There's no moral hazard: Chief Economist of Bank of China International (China) breaks down China's local govt debt into three dimensions: data, the "China model", and central-local govt relationship.Long and detailed article on how China's government finance works.
In reality, the key determinant of government debt sustainability does not lie with the size of the debt but rather factors like inflation and international trade balances. As long as inflation remains subdued and international trade remains robust, domestic demand will not outstrip supply capacity, ensuring sustainability of domestic government debt. Presently, China faces deflationary pressures and consistently maintains a current account surplus, so the sustainability of China's government debt does not pose as a problem.However, within the context of an overall healthy government debt level, the significant disparity between central government debt (low) and local government debt (high) in China merits attention. Based on data from the IMF's Global Debt Database (GDD), the 2022 average share of central government debt in total government debt worldwide stands at 89%, with a median of 96%. This means that in most countries, government debt is primarily composed of central government debt. In contrast, the share of central government debt to total government debt in China ranges from 19% to 27%, by different calculation methods — significantly lower than the global norm. Even if local government bonds issued by the central government were categorized as part of central government debt, this ratio would only increase to a range of 46% to 65%, still below the international average.Compared to national bonds issued by the central government (including local government bonds issued by the central government), local government debts in China are incurred through myriad channels, suffer from a lack of transparency, and carry relatively high financing costs. Consequently, while the overall volume of China's government debt may not be problematic, there is indeed significant debt risk in the local governments of certain regions. Starting in 2020, interest rates on local government investment bonds in some regions have witnessed sharp increases, leading to widened yield spreads and indicating the local government debt risks in these areas....
The East Is Read
Xu Gao: China's historical, unitary framework implies central govt responsibility for local govt debt
Jia Yuxuan, Peiyu Li, and Zichen Wang
Jia Yuxuan, Peiyu Li, and Zichen Wang
Sounds like Canada -- low federal debt because of all the downloading onto provinces during and after the 2009 financial crisis. Federal COVID support measures may have somewhat contributed to improving provincial balance sheets (which have also been boosted by the Ukraine War dividend), but there are always some uncertainties about the sustainability of provincial debt (failing a very implicit federal guarantee).
ReplyDeleteIn Canada, the federal government is little more than a check-writing entity. The provinces have most of the responsibilities in terms of jurisdiction, but not in taxing power.
ReplyDeleteOnce again after me.
ReplyDeleteThere is no debt, only financial savings. That's because there isn't a fixed amount of little silver coins we're all fighting over.
NeilW -- quite right, just using conventional language for the private sector savings. Perhaps I should not.
ReplyDelete