Pretty much everything our media tells us about China is wrong–or at least one-sided–including its tales of a China ‘debt problem’.
The Chinese are, in all times and places, debt-averse and China’s government which, unlike ours, must take long-term responsibility for the economy, is no different. Mao set the example and grew GDP by 6.2 percent annually for twenty-five years without incurring a penny of debt, a feat probably unmatched in history. His successors have been less debt-averse but their more holistically-designed economy–all strategic resources, from finance to land, are owned in common–allows China to incur ninety percent of her debt when she borrows money from herself, without intermediaries, to create productive, publicly-owned assets. The Chinese treasury may thus decide when and how to deal with non-performing loans without fear of contagion or disruption. Wealthy Australia, by contrast, borrows billions abroad for military hardware which it records as assets, though they consume twenty percent of their cost each year in maintenance and produce no revenue. Autre pays, autre atouts.
China’s debt can’t be viewed through a Western lens because Communists designed her economic model in the 1970s to serve a purpose entirely different from ours (which was never designed and has no agreed-upon purpose) so China won’t experience a Western-style financial crisis because she doesn’t have a Western-style economy. Bloomberg, in a rare lucid moment, admits as much:
“While certain industries and enterprises have a lot of debt, Chinese companies’ average leverage isn’t high, according to a recent International Monetary Fund working paper. Since 2006, listed companies that aren’t state-owned have reduced median liabilities to 55 percent of common equity. At state-owned enterprises, however, median leverage has been unchanged at about 110 percent. Leverage has increased at the tail end of the distribution, driven by rising debt at companies in construction, mining, real estate, and utilities. An increasing share of debt is attributed to a few companies with high leverage ratios. China is different from other markets in an important way. Many large corporations and nearly all the major banks are state-owned”.
As a general rule of thumb, lenders, even when they’re lending to themselves, expect utilities to show an asset coverage ratio of at least 1.5:1 and industrial companies to show 2:1 coverage. China’s coverage is conservative:
But, you protest, what’s the quality of the underlying assets? Because its books are open, China’s trillion-dollar high speed rail (HSR) network provides a useful example. Critics liken it to the bankrupted Eurostar Channel Tunnel and predict a similar fate, but does that analogy hold? After all, China’s entire network–from the bonds to the land, rights of way, railway factories, stations, infrastructure and associated development–is owned in common and operated, purportedly, for the common good. There are no externalities.
Nor are there the unexpected cost overruns so common in such projects. The network costs forty percent less than Europe’s thanks to automated installation of mass-produced, unballasted rail sections, pylons and bridges ordered by the meter, trainsets ordered by the score and equipment like the Bridge Girder Erector laying 300 ft. girders in 50 minutes. Planning, production and assembly are tightly integrated, eliminating costly downtime. A predictable percentage of the initial investment returns in the form of increased income and sales taxes rippling out from factories and construction sites, a portion of which is allocated to paying down the loans. By now, planners know that every \$30 million (100 million RMB, PPP) they invest in metro projects permanently lifts a city’s GDP by \$80 million and creates 8,000 jobs. The further they extend the network the more accurate their cost predictions and bond pricing become.
Lines like Beijing-Shanghai are already highly profitable on operating revenue, partly because fares have stayed flat while the average wage has doubled since the first line opened in 2011, meaning that twice as many people can now afford HSR. This year, 1.8 billion riders will save four hours compared to other travel modes and, since the average urban wage is US \$1,000/mo, HSR will save each rider \$24 of productive time for a total of \$43 billion. Some of that will boost economic activity and, of course, tax revenues.
But it is real estate, not construction, taxes or ticket sales, that generates the network’s main revenue stream. The government owns all the land around the purpose-built HSR stations and develops it within a five kilometer radius and collects rents on the improvements.
Xinjiekou Station in Nanjing, above, has dozens of access points, hundreds of stores and thousands of desirable condos within a block’s walk–all developed by the railway and all producing bond-retiring revenues. Those ‘stations in the middle of nowhere’? When new towns are built around them–and they will be–land sales, development and an increased tax base will help retire the bonds, too.
Moving passengers to HSR has freed up older lines to carry more (and more profitable) freight, while nationwide same-day, intercity HSR package delivery boosts online shopping. Predictable revenue increases can be allocated to bond coverage, as is the in-train advertising revenue stream from billions of impressions delivered to captive riders whose incomes are 30–50% above the national average.
Tourism revenues? PNAS says, “HSR is responsible for 59% of the increase in market potential for the secondary cities connected by bullet trains. Economic geographers call market potential ‘a geographic area’s access to markets for inputs and outputs’ and a 10% increase in a secondary city’s market potential is expected to be associated with a 4.5% increase in its average real estate price”. HSR promotes livability and, thus, growth of second-tier cities and collects taxes on the increased revenues. The network helps rural areas profit from their natural resources by bringing business opportunities and tourists and boosts rural people’s outward mobility.
Compared to automobiles and aircraft, which which rely on imported petroleum, HSR uses far less energy and draws power from more diverse energy sources, including renewables. This cuts billions from China’s energy import bills and, since it now owns all the HSR intellectual property rights, boosts rail export revenues–a virtuous circle if ever there was one.
The network, which now reaches remote, second-tier cities like Urumqi and Kunming, promotes social cohesion, labor mobility, a national market and environmental improvement partly because Beijing acts as what Zhang Weiwei calls ‘a neutral government shaping national consensus,’ and it’s a government whose investing is as skilfull as its planning. Beijing selects investment decision-makers from the top one percent of the nation’s graduates (people with 150 IQs, if we trust Steve Hsu’s figures) and a St. Louis Federal Reserve Bank investigation appears to confirm this:Is Government Spending a Free Lunch? Evidence from China, suggests that the the government makes 200-300 percent return on its investments. And investment is, of course, another name for debt.
Though China’s overall debt-to-GDP ratio is higher than the USA’s, three factors set them apart: The Chinese economy is growing four times faster, she has negligible foreign debt exposure and her consumers carry half as much debt as Americans, making her economy less vulnerable to foreign pressures and consumer behavior. According to the Bank for International Settlements, the world’s big debtors line up like this:
With thanks to Byeungchun Kwon and Marjorie Santos at BIS. Renminbi converted to 2017 dollars using purchasing power parity. Excerpted from CHINA 2020: Everything you Know is Wrong , forthcoming, a book about China’s first major transition since the death of Deng Xiaoping. Godfree Roberts lives in Chiang Mai, Thailand and, until the new rail link is completed, will continue commuting an hour to Kunming, China, whence and taking the HSR to Beijing.