Detroit style bankruptcy and Chinese style hidden worries
Since Detroit put forward an application for bankruptcy to the Federal Court, whether many Chinese cities that have been involved in debts will go bankrupt has become the public’s focus of attention. Recently, there was an expert from the National Development and Reform Commission claimed that the Detroit style bankruptcy would not occur in China, and one very important reason was that the Chinese local debts were supported by assets with corresponding value.
Before answering the question, let’s see why Detroit will go bankrupt. The most important reason is that the current public finance is unable to pay the due debts. Detroit has debts of altogether 18.5 billion dollars, including 9.2 billion dollars of pension allowances and medical insurance welfares. The debts seem not so huge, but if the fact that the economy of the city has always been in the state of recession is considered, the situation is serious: the current population of Detroit is 700,000, but its population once reached 2 million in the most peak period of last century. In other words, for so many years, the population of Detroit has always been declining continuously.
The reduction of population is because of the declining of the local automobile industry. Detroit is world-famous for its automobile industry, and here is the base camp for three major U.S. automobile companies, i.e. GM, Ford and Chrysler. But in recent years, under the competition from European, Japanese and Korean automobile companies, the performance of these major companies was not so good in recent years. General Motors Corporation also performed bankruptcy protection procedures after the arrival of the financial crisis in 2008. According to the data of the Bureau of Labor Statistics, currently Detroit has only 32,300 job posts of automobile industry, while in 1990, there were 69,400 such job posts.
Then, will many Chinese cities make the same mistakes as Detroit has made? Especially since the media exposure of debts of many local governments from last year, many people will all ask such a question like this: “Will Chinese local governments go bankrupt due to their heavy debts?”
Viewing from laws, China’s Budget Law does not regulate that local governments have the right to issue bonds, and this means that it’s impossible for local governments to directly bear debts; at the same time, there is no expression of governmental bankruptcy in laws. In this sense, local governments will not walk up the way of bankruptcy of Detroit.
But no permission of bond issuance for local governments does not mean that local governments have no debts. In the past more than ten years, all local governments have developed rapidly, and at the same time, a huge amount of debts have been accumulated. According to the audit results of the National Audit Office in 2011, by the end of 2010, the relevant debts of local governments in the whole country reached 10.7 trillion yuan; in June this year, the selective examination report on regional local debts just issued by the National Audit Office indicated that by the end of 2012, the balance of debts of 36 local governments reached 3.85 trillion yuan, increasing 12.94% over the two years, including 16 regions where debt ratios reached over 100%.
Where do these debts come from? In a strict sense, most debts are not directly formed by the governments, but are formed through various local financing platforms. In the sense of law, these are debts of companies or enterprises, but not governmental debts. If the due debts really can not be repaid by these projects, than what goes bankrupt is only a single company, but not a local government. For example, if a platform company in a certain place is unable to repay the due debts to a bank due to bad management, and the local government is also unwilling to give a hand for aid, then after bankruptcy, what has been formed is the non-performing asset of the bank, finally the bank has to pay the bill, and the local public services will not be influenced —— but in the Detroit style bankruptcy, what have been directly influenced are the public services for local residents.
More importantly, just like the saying of the official of the National Development and Reform Commission, every local debt is corresponding to relevant assets, but is not like the situation in Detroit where debts are corresponding to current payments of public services etc. This means that just in case of tight cash flow, the government can repay debts through selling assets. Because in China, currently most local financing platforms use land as pledge, in today’s situation when real estate prices maintain a high level, these local debts really can not be regarded as a problem. Therefore, Merrill Lynch even thinks that China has overrated the risks of local debts. According to its researches and findings, by the end of last year, it was estimated that China’s local debts were 15 trillion to 16 trillion yuan, the percentage occupying GDP was 30%, and it was still at a very low level. The comparable datum was that the percentages of the U.S. and Japan occupying GDP reached 100% and 175% respectively.
Then, does this mean that the debts of China’s local governments have nothing worry about? Not necessarily. The Detroit style bankruptcy will not occur in China, but there are also the Chinese style hidden worries.
Firstly, though currently most local debts have been used for investments on infrastructures, the financial risks of infrastructures are emerging. The result of the research organized by Shanghai Institute of Finance and Law on the efficiencies of investments on infrastructures indicates that at the beginning of the four trillion plan, the infrastructures of most regions in China’s mid and west areas were too much, and they were not like the whole country’s status of widespread shortage in the financial crisis in Asia in 1997. Among the regions, the investments on infrastructures in the stimulation plan for regions of Qinghai, Xinjiang, Yunnan, Guizhou and Inner Mongolia, the cost-recovering is very difficult in the future 30 years, and potential financial risks exist. In this sense, debts are corresponding to assets, this does not mean that there is no risk, in case of improper investments, the risks are even greater.
Secondly, non-transparent debts go against debt management. Due to the defect of Budget Law, in the budgets and final accounts submitted by local governments to the National People’s Congress, the balance sheets are not provided, therefore the situation of debts are hard to be controlled. More importantly, because various levels of governments all lack the statistic data with unified standards, and there are all sorts of expressional forms for debts, so the statistics for the real scale of debts of various levels of local governments are unable to be carried out, the monitor and control indexes of debt ratios and debt service ratios etc. are unable to be utilized, and the debt early warning mechanism and debt risk management is hard to be carried out. Just because of this, last Sunday, the National Audit Office announced that from August 1st, the thorough finding out for the real situation and assessments for governmental debts at five levels of towns, counties, cities, provinces and central government would be carried out. The audits on local governmental debts on county and town levels have never been carried out before.
If the debts of Detroit can be regarded as the debts in the period of recession, then the debts of the Chinese government are expansion style debts. The vast majority of debts of the former are generated due to maintaining the public services, and the debts of the latter are the costs that must be provided for economic development. If there is sustained and stable growth for the economic situation, the debts generated due to the financing for infrastructures will not be evolved into crises-just like the debts generated by the large-scale infrastructure investments since 1998 have been digested through the last round of economic growth.
But in the next few years, will China’s economic growth still continue the growth rate of the past ten years? This might be the biggest doubt.
Originally published on Southern Metropolis Daily | 2013-8-2
