China Economy: On The (Un)Sustainable Level Of Debts24 May, 2011, 17:56. Posted by Zarathustra
Tags: Debts, Economy
Reinhart and Rogoff (2009) said, the level of debts which is unsustainable “depends”. In their book, they discussed developed countries such as the United Kingdom, the United States and much of Europe have “graduated” from the sovereign debt crisis (sort of), in which they seem to be able to borrow much more than the other countries, which have not “graduated”, and without any problems. The United States is now a perfect example, as even countless people think that the United States is “broke”, and even with all those debt ceiling nonsense, US Treasury yields are now falling.
So the short answer of how much debt is definitely unsustainable for a national economy is: it depends. Or as I stated in my discussion of the debts in Hong Kong real estate market: it is [sustainable], until it is not. And Michael Pettis, in his latest newsletter, said that “there is too much debt whenever the market believes that there is too much debt”.
That, I admit, sounds like rubbish.
On the (un)sustainability of debts in China, Michael Pettis said that in the past:
… analysts disagreed most of all with the claim that debt was rising at an unsustainable rate. It was widely believed that debt levels were very low and were rising at most in line with debt increases in the previous ten to twenty years. In that case, to worry about unsustainable increases in debt seemed beside the point and unnecessarily alarmist.
But in fact this has always been the fundamental problem with the highly centralized investment-driven growth model. In every case it has eventually resulted in an enormous debt build-up – sometimes, as in the case of Brazil in the 1970s or Korea in the 1990s, external debt, but more often, as in the case of Japan in the 1980s and the USSR in the 1970s, domestic debt – and once the debt limit was reached, investment growth collapsed and with it GDP growth. In China, I argued, the point was not whether there was currently too much apparent debt (and because of lack of transparency it should have been clear that there was a lot more debt than was apparent), but whether the growth in debt was sustainable.
Yet the overall mood has changed somewhat, particularly after Victor Shih of Northwestern University shock everyone with his own estimate of debts raised by local government financing vehicles (I have touched on the local government financing vehicles briefly here), and since then
there have been many stories of new unexpected debt, most recently, for example, the copper financing schemes.
As a result of more understanding of debts in China:
Debt, in other words, have clearly become an area of worry for even the most blithely optimistic among China analysts, and most of us expect debt levels to continue rising very quickly this year and next.
So the belief that there’s very little leverage in the system is becoming a minority view. Those who still think so include Shaun Rein, who is probably living in the Fantasyland.
We do have some obvious places to look for debts in the Chinese economy, including local governments, Ministry of Railways (see 10 reasons to short China) and real estate developers, and there may be debts in other hidden places that we don’t know yet. So the amount of debts we can possibly know is at best the lower bound of the actual amount of debts.
But is that sustainable? Or for how long can the rapid growth of debts be sustained? Michael Pettis guesses that the debt level will probably reach an unsustainable level in 4-5 years, but recognises that there is no real reason for that beyond intuition.
Rubbish as it may seem, I have to repeat once again: it is sustainable, until it is not.