The China Bubble

Gady Epstein, 12.10.09, 06:00 PM EST
Forbes Magazine dated December 28, 2009
China's economy is humming along in high gear, thanks to a fast-growing pile of dicey debt. Such booms tend to end badly

China's economy is the envy of the world. As developed nations struggle to eke out a bit of growth and to get unemployment rates out of double digits, Chinese output gallops ahead at an 8% annual rate. This $4.7 trillion economy, it seems, is the world's dynamo and the prototype for the future.

Take a close look, however, and you may come away thinking China resembles nothing so much as Japan shortly before its stock and property markets melted down two decades ago. A speculative frenzy of borrowing and bidding up is at work. If and when prices crash, there will be hell to pay.
Signs of the times: government bureaucracies funding themselves by foisting debt on state-owned business enterprises; local governments raising capital by selling land at sky-high prices to corporations they own; and a People's Bank of China lavishing liquidity on the entire system in a way that makes Federal Reserve Chairman Ben Bernanke look downright stingy.
"It's a Ponzi scheme whose head is the central bank, and it can print money," says Victor Shih, a China expert at Northwestern University.
The U.S. government's $7.2 trillion in debt at the end of June represented 50% of gross domestic product. The Chinese government's officially disclosed $840 billion in public debt represents less than 20% of GDP. But the People's Bank of China and the treasury are also on the hook for potentially $1.5 trillion in off-balance-sheet debt owed by cities and provinces and entities they control. They're also implicitly obliged to backstop $1 trillion, both in loans that "policy banks" were directed to issue, even when they made no economic sense, and nonperforming loans that the government removed from the books of state-owned commercial banks over the past decade.
Add it up and the national government is responsible for debt equal to over 70% of 2009 GDP. That doesn't count any loans generated this year that might go sour amid a 30% increase in debt balances nationwide. (The U.S. government, in addition to its direct debt equal to 50% of GDP, is responsible for cosigning of mortgage borrowers' obligations equal to another 18% of GDP.)