The idea that China’s economy is an increasingly vulnerable house of cards has reared its head again.
The China bulls and bears are fighting it out over whether the economy is overheated and whether the strong Q3 growth figures are (a) exaggerated and (b) real.
I am skeptical of the stats, and I’m perfectly willing to believe that the government may well be, for example, buying up all the cars on the market in order to spin the consumption figures and then storing those cars in large warehouses.
Victor Shih, an assistant professor at Northwestern University, has written an excellent blog about the way in which the government keeps its liabilities off the balance sheet.
He points out that while everyone focuses on China’s assets, such as the $2 trillion of foreign exchange reserves, no one is taking a close look at the country’s liabilities.
Growth this year, after all, has been at the cost of at least 4 trillion yuan of stimulus money, and the state-owned banks are unlikely to get all of their 7 trillion yuan of new loans back either.
He points out an accounting difference between OECD countries and China when it comes to public investment. In OECD countries, debt is placed squarely on the balance sheet when it comes to public works projects. In China, however, local governments set up "urban development companies", special vehicles which keep that debt off the books.
He also says that the bank lending is nowhere near finished. Local governments have rushed through a ream of projects, all of which will require more money before they are done. Nomura Securities estimates that new lending will have to be 10 trillion yuan in 2010 and another 10 trillion the year after to finance all the work.
To be fair, China may have invented many things, but it didn’t invent the idea of using special companies to keep public debt off the government books. The UK government, for one, has immense hidden liabilities through its "public private partnerships".
However, it is worth keeping in mind that China’s huge, investment-led, growth has not been entirely without cost.