A blog on Chinese economy & society

Just how much debt does China have?

with 2 comments

The general perception is that China has very low debt burden, estimated at roughly 18% GDP, especially when compared to the sea of red ink that other nations swim in. However, this figure counts only central government debt (not that other nations are more forthright in debt accounting though). How much debt has the local governments borrowed over the years?

China’s powerful Banking Regulatory Commission had previously ordered an audit on all local government financing vehicles, and initial reports have come in. The 21st Century Herald reported that 2009 total local government debt amounted to RMB7.4 trillion (USD1.1 trillion). So by this estimate, total debt-to-GDP ratio is at 40%. While not quite the catastrophic level suggested by Victor Shih (USD1.6trillion), it’s still rather worrisome, especially given the local governments’ propensity to waste and corruption.

So how much of this USD1.1trillion might become bad debt? Full report isn’t in yet. But  the parts that have completed the audit aren’t very promising. 90% of local government debts are bank borrowings and 60% of which are illegal guarantees. If we simply do a back of the envelope calculation and extrapolate from the data that we already have, than local bad debts amount to 12% of 2009 GDP. Well, so much for the savior of world economy.


Written by Cindy Luk

April 26, 2010 at 6:37 pm

2 Responses

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  1. Hi Cindy,

    Didn’t the central government recently announced that they will nullify all guarantees local governments provided for loans taken by their financing vehicles?

    I guess it’s THAT serious then …

    BTW, I enjoy reading your brief snapshots of what’s going on in China’s economy. Nice companion to M. Pettis’


    April 27, 2010 at 3:44 am

    • JC, Thanks for your kind words.

      Those loans are deemed “illegal” precisely because the guarantees from local governments had been nullified. But unlike nullifying derivatives arrangements with foreign investment banks, this only means the bad debts will sit on the balance sheet of the Chinese banks, which are mostly state-owned and are implicitly guaranteed by the Chinese government.

      Cindy Luk

      April 27, 2010 at 10:52 am

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