Inflation and debt could derail China
Baku, June 7 (AZERTAC). Credit downgrades can elicit fascinating reactions. Take a January move by Standard & Poor`s to cut Japan`s rating to the same level as China`s. I expected the backlash to come from Tokyo. Instead, it was the Chinese who were aghast.
Every Chinese official I`ve met since is bewildered that 10 per cent growth and $US3 trillion ($2.8 trillion) of currency reserves don`t buy a better grade than the AA- that China shares with an overly indebted, ageing nation that names a new prime minister every year. Many in China even think their economy deserves a higher score than the US, with its AAA rating.
The jump in local debt, which is tough to measure, increases the risk of default around the nation and leaves Beijing with a touchy question: must it bail out local governments that went too far?
Cities and provinces can`t borrow directly from banks, so they set up investment companies to skirt regulations. Fitch Ratings predicts that, because of lending to these vehicles and to real estate developers, bad loans might reach 30 per cent of the total at China`s banks.
That`s not all. One of China`s post-crisis revival plans calls for building 36 million low-cost homes by 2015, an initiative that would add 2 trillion yuan ($287 billion) to local government borrowing by 2012. Such plans will bump up against efforts to rein in property prices and inflation.
Japan`s rise and fall during the past 25 years is a path China knows it must avoid. There is, of course, a difference between Tokyo and Beijing. Japan suffers from political paralysis, but China`s system gives President Hu Jintao and Premier Wen Jiabao enormous latitude to steer the economy.
Bad debt is inevitable for China. The question is, will it merely be a challenge for the national government or ruinous for the entire nation?
No economy grows in a straight line forever. As China applies the brakes it could trigger some chain reactions around the globe.
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