China's Debt is Exaggerated – In Praise of China

China’s Debt is Exaggerated

China’s Debt is vastly over-exaggerated. China’s net debt to GDP is considerably lower than that of Japan, the U.K., France, USA, Korea and Australia, as this chart from former US Treasury official and World Bank country director for China and Russia, Yukon Huang, makes clear.

I referenced World Bank figures because the Bank is consistent in what it counts as ‘debt’ when comparing countries. The World Bank is forced – by virtue of its charter and its staffing – to be relatively neutral and it has direct, collegial access to every member country’s books and has used the same formulae for decades to calculate national debt.

The US also has an unprofitable sector, as does every country. Since the percentage of unprofitable enterprises is proportional to an economy’s growth, and China has the highest rate of growth, it has the lowest proportion of unprofitable enterprises.

Ultimately all growth is investment dependent. China’s investments are extremely profitable at present. The St Louis Federal Reserve estimates that the multiplier on Chinese government spending is two. In other words, the economy is creating surplus capital to replace that which is destroyed.

According to Forbes Global 2000 rankings, the four biggest, most profitable public companies on earth are Chinese. They’re not even manufacturers – they’re service businesses. They’re all banks.  And they’re State-owned because the Chinese Government to ensure that they perform their function: lending money cheaply and safely to businesses so that 7% growth can continue smoothly. Last year one of them had $166 billion in sales, $44 billion in profit, $3.32 trillion in assets, and $278 billion in market value. No private company anywhere comes close. And it’s just one of hundreds of immensely valuable SOEs.

China has NONE of the conditions that led to Japan’s debt buildup. China has $4 trillion in foreign reserves; $3 trillion in personal savings; close to zero net corporate debt and an economy growing 400% faster than ours. Their investment-dependent infrastructure is an asset that’s paying off handsomely and more than covering its costs. The Chinese economic model cleverly captures some of that payoff to retire the debt. Here’s how they do it: Colonial First State – Global Asset Management Report by James White.

China’s debt fragilities are overstated. They don’t threaten the model that James White describes. The proof is in the numbers. Not just headline growth, but stable and low inflation, strong wage growth (7% annually for 40 years) and rising tax revenue – to be augmented from this year by a universal land tax.

Now, let’s hear an opinion from a private-sector corporation whose current investments are dependent on China’s future: once a year Boeing updates its Current Market Outlook (CMO), which forecasts the development of the global aviation industry and global aircraft demand 20 years into the future. In its latest CMO for the years from 2015 through 2034, Boeing remains optimistic about the long-term development of the Chinese economy in general and China’s domestic aircraft demand in particular. For China, Boeing expects annual GDP growth of 5.6 percent and growth rates for passenger traffic and airfreight of 6.6 percent and 7 percent respectively, making China the world’s largest domestic air travel market. Boeing forecasts this growth to result in almost tripling China’s domestic commercial aircraft fleet, from 2,570 aircraft in 2014 to 7,210 aircraft in 2034. Including replacements for retired aircraft, this growth is forecasted to generate a net demand of 6,330 aircraft with a market value of $950 billion. China’s domestic widebody fleet is projected to grow from 460 aircraft in 2014 to 1,680 aircraft in 2034 or from about 18 percent to 23 percent of China’s total domestic aircraft fleet.

Put no faith in Western mass media if you want to learn about China’s economy. They’re utterly clueless about our own economy  – whose collapse they completely failed to predict or subsequently explain. Faith-based economics is dead. Results are king. The Chinese government has been truthful about its results for 40 years. Put your faith in the Chinese government if you want to know what’s going on in China. The Chinese people, who are probably 5 points smarter than us, trust it. 85% of them say their media gives a pretty decent picture of reality.

The St. Louis Fed Report

This paper quantifies the macroeconomic effects of government spending in China. We show that

(i) government spending in China Granger-causes output and investment booms as well as inflation, and

(ii) it has a multiplier close to (or larger than) 3.

(iii) The large multiplier effects are found not only in aggregate time series data but also in panel data at the provincial level.

(iv) We provide a theoretical model with market failures and Monte Carlo analysis to rationalize our empirical findings”.

I have been carrying on this conversation for almost 40 years. During that time China’s GDP has gone from nothing to being the biggest in the world, its people’s wages have risen 400% and its infrastructure has gone from dirt roads to the largest, fastest, most profitable rail network on earth – among other things.

Every one of those 2,000 weeks a different ‘expert’ found a reason why this couldn’t happen, wouldn’t happen, isn’t going to happen, or cannot continue. Several prestigious publications, like Foreign Policy, The Economist, the Wall Street Journal, and FT have published literally thousands of these predictions. Thousands, as in ,000.

Each of those 2,000 of the experts’ ‘reasons’ was dead wrong. Yet they’re still finding more ‘reasons’ and getting angry when I question their validity. I’m beginning to question these critics’ sanity. It’s as though they’re involved in a Holy War, not a discussion of economic models. None of them will read a 12-page analysis of how China’s economy actually works, yet they invest immense effort to prove that it does’t or can’t or won’t work.

Our own economic model has always been faith-based. It’s little more than a string of assertions that our model produces the best of all possible worlds. This nonsense is promoted by the oligarchs who run the USA. Our model is being out-performed by a new model and there is an approaching crisis of faith as that slowly dawns on ordinary folk.

The Chinese model is not faith-based. It’s worth studying because it’s non-theoretical and non-dogmatic. It’s pragmatic and its working at delivering the kinds of things we all want. Like the best public schools in the world (which are now in China, by the way) and the best transportation system and cheapest defense…

What’s so magical about private investment? Did you see how much $$ those private investors lost on the Shanghai Exchange last week? They’re not as good at investing as the government.


Our media are notoriously untrustworthy sources of information (WMD was just one of hundreds of fabrications). That’s why only 40% to us trust them. You’ll have to do your own digging to get at the truth. The World Bank, The IMF and the OECD all believe China’s published growth figures and they get to peek under the hood. But you can perform your own reality check if you don’t trust these institutions, all of which are run by Western governments, incidentally. You can look at the end results. You can look, for example, at China’s export growth as reported by the WTO:

1981-85 +8.6%
1986-90 +17.8%
1991-95 +19.1%
1996–00 +10.9%
2000-05 +25.0%
2006 +19.9%
2007 +20.8%
2008 +17.4%

You can examine Chinese wages 1980-2014 and see that, net of inflation, they increased by 7% annually. In other words, they doubled ever ten years. Our wages have been falling for 40 years, net of inflation. Another reason to look for a different economic model.

Or do a real reality check: buy a ticket to Beijing. Study the terminal as you deplane; it’s the largest and most beautiful in the world. It wasn’t there 8 years ago. Nor were most other things you’re about to see. Take the new subway (downstairs) into town, buy a 1980 photograph of Beijing and compare it to what you’re seeing. Repeat this performance in as many Chinese towns and cities as you wish. You’ll feel that 7% growth rate is too low to account for the transformation.

Our understanding of ‘debt’ needs refreshing. Debt is the liability side of the balance sheet. For every debt there’s a corresponding asset. The money was loaned with full security (liens on assets, etc.) According to the St. Louis Fed (above) the assets that China create with the debt (bond) money return 300% over the course of their 20-30 year term. So there’s no need to cut back on debt now. It’s still paying the fat dividends your grandfather got from his Erie Canal bonds.

Debt is currently a win-win because the rich guy’s money finances the poor guy’s shiny, fast, air-conditioned subway that takes him within a block of his office safely, in all weathers, for 60¢. The rich guy is happy to get a safe 3% and the working guy is happy to be home with the kids by 5:30 instead of 7. It’s a win-win. Those are precisely the investments China is making right now all over the country: they’ve literally got rich people lining up to lend them money cheaply and poor people lining up to thank them for the new subways – and for the fact that their son can get home for Chinese New Year from the other side of the country in for hours instead of two days. There are still plenty of win-win deals available and there probably will be for at least 10 more years.

China’s in Debtors’ Paradise right now. It’s a sweet spot in world financial history. There’s tons of money looking for a safe, low-interest home so China can borrow for next to zero interest. Our own beloved Fed might even let them have some at that price: after all, they’ve lent trillions to private banks that are much shakier than the Chinese Government, at 0%.

China’s Government turns that super-cheap money into sleek subways and affordable housing and switching from carbon-based power to cleaner sources. Most importantly, they’ve figured out how to monetize enough of the benefits of this new infrastructure so that the bonds get paid off without stress. No nation on earth has nailed this as well as China. It is one of the greatest contributions to public sector financing ever devised. The bad news is, it requires every element of the economy and every Chinese to cooperate. The good news is that the Chinese are better than any people on earth at big-scale cooperation.

Right now, China’s infrastructure shopping list is endless. The average Chinese worker earns less than his counterpart in Kazakhstan, Colombia, or Ukraine. They’ve got a long, long way to go.

What do YOU think?

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