1月7日，我院副院长朱宁教授受邀担任CCTV NEWS《Dialogue》栏目的对话嘉宾，围绕着中国地方政府的债务危机问题，朱宁教授进行分析解读。
 

China's local government debt risk

Hostess: Hello, welcome to dialogue, coming to your life from Beijing on CCTV News. I’m your hostess Tianwei. An official financial audit released recently in China shows the country’s local government debt reached about 17.9 trillion Yuan at the end of June, 2013. Even though the level remains lower as some say at seven percentages of GDP than many developed countries including the United States and Japan. Some economists already warned that such rapid debt run up has been associated with the financial risk elsewhere. As a result, some say China issues guidelines in the effort to address growing financial risk from what could be an explosion of debt. But how big exactly is the debt in China, how well will the guidelines work and how much will the slowdown in China’s economic growth help to adjust the economy or non-necessary. So, to address all these questions, joining us in the Studio by William Hess, he is Director of PRC Macro Advisors, welcome to our program, Sir, and also joining us, Professor Zhu Ning, he is Deputy Director of Institute of Advanced Finance of Shanghai Jiaotong University, welcome as well, Sir. Before we go to a discussion, gentlemen, with the two of you, let’s take a look at the background report.
 

Hostess: Professor Zhu, how many answers can you provide to the two questions just raised by Mr. Hess?

Zhu Ning: I guess, I think there are just many answers as the questions exist. I think there are probably two ways to look at this. One is, the growth rate of the debt. And I think that is one thing that is really concerned to many observers. But on the other hand, I think to the difference, people say that well China’s government debt, especially the local governments debt is different in the way of they use the debt to invest for future infrastructure in the way of building more roads which will have further appreciation of wealth and prices. So, that is different from other developed economics which use the financing to purchase medicare or medical care. So, I think it really depends on, going back to William’s answer, it really depends on what kind of institution or mechanism that behind the way how the local governments finance their debts or liabilities.

Hostess: And before you answer that question, I want to add another one to you as well, Professor Zhu, how much guarantee do we really have about the returns of all of the infrastructure investment. That probably another question is to be answered.

Zhu Ning: That is another billion dollar, if not, trillion dollar question, I guess.

Hostess: It is a trillion dollar question.

Zhu Ning: Yes, I think that is what I become concerned, because when you look at what has been able to finance the debt of local governments in the past decades. It has been a large, a large question of the finance has been coming from the auctioning off of the local land. But another is, the housing price has already reached a very high level and now that some of the most priced land has already been auctioned off. The question remain is what do local governments have in the future to keep financing their borrowing spread. And the question here is whether, I think, as William very probably put it out, will the central government step in if something really bad happens. That is, I think, as most expect, as long as the central government is standing behind the local governments.

Hostess: Alright, I thought economists are very good at answering questions. Apparently, today we got two economists, always keep on asking questions. But that certainly shows that the tremendousness of this issue that is very much related to the Chinese economy, very much the fact of Chinese economy, I want to say. But let’s concentrate a little more about this comparison. Some estimates, for example, fix their estimate the Chinese debt rate in terms of GDP ratio is only about 218%, they suggest, that is much lower than, let’s say, the United States, or even Japan, and therefore, there should not be, as they argue, much risk at all, Professor.

Zhu Ning: I think they have a point in the way that what….

Hostess: Ohh, by the way, have to clear this up, also, because the debt they are talking about includes the debt of the government, as they say, the debt of the companies and also the debt of private citizens, households rather.

Zhu Ning: Yeap, I think if just look at the sizes or the levels of their liabilities, I think, China is not that very bad. But that, I guess, what is concerning the economies or the reserves of the following two reasons. One is, I think, Chinese financial system is not as developed as those in other developed economies. So, China may not be able to finance such a large level of liabilities without bringing into some risks. So, this is one part of the concern. The other part of the concern, which is the bigger concern of mine, is, I think even with the most up-to-date all brought results, I think, people still feel there would be another way to think of the entireness of the picture, the way how local governments borrow, the way how local governments use local SOEs, state-owned enterprises, to finance some of their projects and how local governments provide some of the impressive or hidden guarantees. That, I think, remains a little bit unclear. I think, that is the contingency risk. That is what people are really more concerned. It is not just the sizes of the liability. It is what is lying behind whether we can see for the moment.

Hostess: A lot of whistleblowers behind the table, but some argue the other way around, for example, about the issue you just mentioned, Professor Zhu, which is China’s financial market and China’s financial system is not as well developed as many of the other economies we just mentioned. However, some say this probably could be a strength that China has, because eventually the central government and central bank can easily come in and control the situation, Professor.

Zhu Ning: Well, I think there is always a supervising to every single stock house. I think one could look at things in that way.

Hostess: Is it this namely supervising or actually very nature of the system.

Zhu Ning: I think, now we are talking about the diffidence between the short term and the long term circumstances. Of course, in the short term, yes, with more control on the financial system, a part of central bank or a part of financial authorities could step in and they leverage some of the crisis. However, if you let this kind of distorted expectation build up, I think that is going to create even more risks for the country to handle, because if everyone believes even if I default, the central governments would come in and save me. Then everyone would have no fear for bankruptcy, would have no fear for default and that would lead into this large, or people call, I think, “capital black hole”, which absorbs so much money and…

Hostess: We always say feeling the stones for acrossing the river. But well, now we see that the system is trying to cross the river without necessarily knowing where the stones are. This is a very interesting phenomenon, Professor.

Zhu Ning: Yes, I think it is closely related to the interest rate liberation process. Given that it is a process, we would have to encounter some of the problems that you have never imagined or you have never been able to solve. But I think it is going in the right direction. I think the central bank by, is willing to allow those two credit questions to happen. I think it is also showing its readiness to keep pushing forward the liberation of interest rate. And also, I think the market is becoming more and more adapted to getting a feel of what the central bank is trying to do and in fact that is good and dynamic. Well, the central bank is sending a correct and clear message and then the market participants are trying to respond to that. So, I think that I see it as a very encouraging side. What my little bit concern is, well, because, we have, the Chinese, you have imagined, the Chinese financial system is largely dominated by banks. And even the interbank, the market is largely about how to transfer the risks from one bank to another or how to find a very good order for the entire systematic financial risk to be transformed, or to be shared or to be diversified outside Chinese banking system. So I think that is a bigger question about how we will gradually grow from a bank-dominated financial system to a more direct financing or more western-like capital market driven financial system.

Hostess: But of course, China has its own characteristics. Some say there is a big phenomenon of the so-called shadow banking. How much role does that play and whether the recently widely reported guidelines by the State Council is going to address some of the illness of the shadow banking well preserve the best accessories. We are going to discuss all of these issues right up in this place. We will be right back.

Zhu Ning: Of course

Hostess: Welcome back. You are watching a live edition of Dialogue. Our topic today is China’s ever-mounted local debt. Some say it is a big danger. However, others say it is still controllable at this moment, which means the Studio once again to discuss that issue and many others, Professor Zhu Ning, he is Deputy Director of Institute of Advanced Finance of Shanghai Jiaotong University, and also William Hess, he is the Director of PRC Macro Advisors, gentlemen, welcome back. Earlier, you two tried to explain to us (), what your concerns are and what your long long () questions are. And now let’s try to address some of the, for example, the very crucial issue of shadow banking. Whenever you go to international conferences on Chinese economy and the world economy, you will hear many others from around the world shouting the word “shadow banking in China, shadow banking in China”. But, exactly, what is the role of shadow banking in the current Chinese economy? How do you see the two sides of it, Professor Zhu?

Zhu Ning: Well, I think, just by its name, “shadow banking” is the informal form of banking which is not under the schooling of, say CBRC, the banking regulatory authority. And in China, I think it comes in quite a few different ways for…the most noble way, I think, is the trust companies and the wealth managing products. Some of them have the license to sell; some of them don’t even need to have the licenses. And I think a new comer to the game is what we call the internet financing. And those are internet companies using their marketing sources or using their additional division channels try to market the financial products on the other side. They are trying to develop on financing products. And even some of the traditional banks, they can do some off the balance sheet or not under regulation activities or business which are also classified as shadow banking. It is really a big mirror of activities which can take a while to explain. But I think to China, I think, shadow banking can be both good and bad. It is good, because, well, the traditional banking system has its own requirement. So, it doesn’t have the flexibility in servicing some of the small and medium enterprises. But the bad thing, of course, the lack of regulation, means lack of disclosure and uncontrolled risks. So that is, I think, what people are very concerned about at the moment.

Hostess: You broke up the growth rate of Chinese economy. I didn’t do that. But I have to concentrate on that. Now, Professor Zhu, we have seen for the last quarter of the Year 2013, there is a slowdown of the GDP growth. That is quite obviously. Many believe it is still healthy. But nobody could guarantee its slowing down in the GDP growth will necessarily need an adjustment of the Chinese economic growth structure. And therefore, people ask you the question once again what about the slowdown of the economy. How is it really related to, as they say, address the illness of the shadow banking. How much can Chinese economy stand? I know these are all trillion dollar questions. That is why I add them to you, Professor.

Zhu Ning: Well, I think William made a very good point about making a connection between the shadow banking system and the overall economy. I think, it is a sort of reflection of the economy, the balance between the quality and the speed of economic growth. And to me, I think, I mean, going back to your question earlier, I think there is no guarantee. By slowing down the speed, we can solve all those problems. However, in my view, without slowing down the economic growth speed, it is almost impossible to address any of the issues we have been talking about, because some of the problems that we are facing or we are trying to solve right now largely come from the very fast economic growth in the past five years right after financial crisis. So what has been happening is, after the financial crisis, the large amount of monetary and fiscal stimulus packages has directed capital into many of the ways which are not really productive. And that fact or that expectation has led many local governments and many companies to make unwise investment which is increasing the risks. So, now to unwind or to address those problems, we would have to slow down even though it can be paid for, it can be hard to be digested in the short term. We probably have to do that.

Hostess: You are not giving a final answer to that; but I’m sure you have more to, to offer, Professor.

Zhu Ning: Well, I tend to agree with William. I think, in the west, we say failure is not an option. However, I mean, I think, in China’s research, we all feel that failure is a necessary option. You’d have to be willing to let some bad companies fail, let some bad local governments fail to set an example for other companies and for other local governments. So, you have to behave better. I think this is, just you cannot teach companies or governments in any better way than having a few bad apples, bad apples being taken away. So, I think this really important, because if you look at what has been happening in China’s bankruptcy or causes. Not a single government has been filing for being in a bankruptcy. Only very small percentages, less than 1% of Chinese companies has been filing for bankruptcy which is far less than the level for many other economies, major economies. 

Hostess: Alright, here I want to offer you a number, PBOC, People’s Bank of China, the central bank, just for reference for our audience, injected a net total of about 113.8 billion Yuan or about 18.6 billion US dollars into the country’s banking system last year. That is quite the degreed lower compared to the money they injected into the system back in Year 2012. Do you think that is a part of the attitude that already has been shown?

Zhu Ning: Yes, I think the PBOC or the central bank has already been trying to restore the fiscal system into a more sustainable state. The past five years has been really really fast growing. But they would have to deal with the consequences now.

Hostess: I hope our program today is not only offering our audience a long release of questions crucial to ask just at this moment about China’s financial system and the help of the economy but also give some of our instincts to answer those questions. I want to thank two of you, gentlemen, for being with us, for this traditional program, Zhu Ning, Professor of Shanghai Jiaotong University, and William Hess, Director of PRC Macro Advisors, thank you so much for being with us, thank you. And thank you for watching. I’m Tian Wei in Beijing. Byebye.

China's local government debt risk