Government Debt Level Not 'Very Dangerous'

The debt piled up by different levels of Chinese government probably amounts to much more than is reported by official statistics, but the overall burden cannot be regarded as "very dangerous", said a former Chinese finance minister on Saturday.

Xiang Huaicheng, the minister of finance from 1998 to 2003, said he estimated the debt accumulated by local governments to stand at somewhere around 20 trillion yuan (US$3.22 trillion), nearly double the official estimates.

"The debt of the central government is relatively clear to us, ranging from 7 trillion to 8 trillion yuan, while the leverage among local governments cannot be accurately measured because of a lack of transparency."

Xiang made the remarks while attending the annual Boao Forum for Asia. He said that by the end of 2012, although the total debt amount might be several trillion yuan higher than a year earlier, the debt ratio against total GDP stayed essentially the same, at about 40 percent.

"That debt ratio is not considerable. In addition, domestic debt accounted for 95 to 98 percent of the total debt, which helps to guarantee overall health of the leverage level."

He added that the central government has attached great importance to the "sustainability" of the debt, another factor that might ease worries about the problem. But some issues need to be closely watched, even if they now seem safe, such as loans extended by Chinese policy banks, Xiang said.

Concerns over the government debt in the world's second-largest economy have intensified since China introduced a 4 trillion yuan stimulus package in 2008 and later tightened the reins on the white-hot real estate market, which affects local governments' land sales, a major contributor to their fiscal revenue.

The leverage of China's economy has risen strongly in the past five years, and the majority of new lending in recent years has taken place outside the core banking system, said Standard and Poor's Ratings Services. It is estimated shadow banking accounted for 22.9 trillion yuan of credit in China as of the end of 2012, 34 percent of the total loans in the banking sector and 44 percent of China's GDP in 2012.

Fred Hu, chairman of Primavera Capital Group, said China might become the next spot for a debt crisis in the medium and long term as fiscal outlay has to rise and will account for about 50 percent of GDP, in contrast to the 36 percent of the US and Japan.

Stephen Green, chief China economist at Standard Chartered Bank, warned that for an economy with an already high leverage level, "re-leveraging up" increases the overall macro risk, as many financial crises are foreshadowed by an increase in leverage.

"It (the government debt problem) needs to be reported, discussed and managed. The government manages it, and people have confidence in the government's handling. I think it's very important," said Peter Costello, former federal treasurer of Australia.