November 07, 2016

Asian economist makes the case that China's debt is not a big problem but that fiscal reform is needed

A Global Times reporter Liu Jianxi (GT) talked with Yukon Huang (Huang), a senior associate in the Carnegie Asia Program, a leading economist in Asia and former World Bank country director for China, about China's financial issues

The Chinese-language version has been accused of having a strong pro-government slant, and of attracting a strongly nationalistic readership, the English-language version has been described by one of its editors as taking a less strident approach. It is an international paper run by the People's Daily newspaper.

Some Economists say China will face a financial crisis

Huang - Over the last 10 years, China's debt to GDP ratio has increased from about 150 percent to 250 percent. The debt ratio is not unusual given China's stage of development. The level is not a worry. The worry is that if you compare China with other countries whose debt ratios have increased by the same amount in a short period, almost all have experienced a financial crisis. So why not China?

1. in China, borrowers are often State-owned enterprises or local governments, and lenders are State-owned banks. In other countries, lenders and borrowers are usually private. If the borrower and lender are both State-owned, any financial problem eventually becomes a budget issue, and the outcome depends on the financial strength of the government.

2. land prices have increased on average from 400 percent to 800 percent over the last decade which is unusual. So a lot of debt in China is actually financing the costs of land and the transfer of property, although many observers haven't realized it.

Property prices went from essentially zero when State-owned to something which is quite high and comparable to global market values. I don't think China has a debt problem, because property is valuable and the increase in debt is the result of financial markets recognizing its value. I do not see a crisis coming but there will be increased volatility that needs to be managed.

Fiscal reform is needed

Huang: For China's local governments, the budget system is weak, households don't pay much income tax and there is no property tax. In the US, local government budgets are large and dependent on property taxes. When localities want to build a road, they don't borrow from banks. In China, local governments often borrow for infrastructure and other activities. China needs to move to a financial system which is less bank-dependent, and this means improving the budget system.

Another aspect is that localities in China own land. They sell land to developers and get money to finance schools or roads. But sometimes they go too far. They build too many malls and houses which then become vacant. Sometimes they drive up prices because they want to develop more to generate more revenues but this can lead to overbuilding and excess unsold properties. With a stronger fiscal system, there is less incentive to overbuild. To me, China's debt problem is not a banking issue, it is a budget problem.

Prediction on China's Real Estate

Huang: First, prices have increased in Shenzhen, Beijing and Shanghai much more than in second- and third-tier cities. This is because of the excess supply of unsold housing in the smaller cities relative to the largest cities. The government is telling everyone: please move to smaller cities. Thus local authorities have been building more in the small- and medium-sized cities. But people are not coming. Even though property prices are lower, people are more focused on getting a better job, and the higher paying jobs are usually in the bigger cities.

Government policies are also distorting the housing market. A property bubble usually occurs when government policies attempt to promote more sales and construction than market conditions warrant. Zoning and building regulations distort prices and often make prices too high in major cities. Restrictions on migration distort demand. People should be allowed to move to where they can find good jobs. In addition, China's major cities are not as densely developed in its core as cities in other countries and thus development is pushed out to the suburbs. This make centrally located property too expensive. The tendency to tighten and then ease guidelines for buying homes also encourages bubbles.

SOURCE- Global Times

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