China’s Public Debt Concerns Unfounded, Economist Says

Concern over the level of public debt in China has ratcheted up in recent weeks, but this doesn't worry Fred Hu, a China expert and a member of the advisory committee of the Securities and Futures Commission.

“In my professional career, every few years someone or other turns up predicting a debt crisis for China. At this point of time, I think China is in good shape, and there is no imminent debt crisis in China,” Hu told South China Morning Post.

Public debt in China is rising and is expected to exceed 16.3 trillion yuan ($2.7 trillion) by the end of the current year, which is 29 percent of the country’s gross domestic product.

That figure moves up to 55 percent if debt racked up by local governments and agencies is added to the equation, raising questions about the ability to repay this debt and leading to questions about the financial health of the world’s second largest economy.

Over the past few months, many have voiced their concerns over China’s rising debt levels. Last month, rating agency Moody’s lowered China’s credit outlook to "stable" from "positive," while Fitch Ratings cut its rating on the country’s long-term, local currency sovereign credit rating to A+ from AA-minus.

The current concerns can be traced back to late 2008 when the central government unveiled a massive stimulus plan in response to the global financial crisis. Banks and other lenders funded massive building and infrastructure efforts, while local governments across the country also borrowed to fund their big projects.

The spending helped insulate China from the worst effects of the crisis. However, local government debt subsequently ballooned and had reached 10.7 trillion yuan at the end of 2010.

Yet, analysts like Hu consider China’s debt -- considerably lower when compared to the debt levels of the U.S. and cash-strapped European nations -- to be at manageable levels until it stays below 60 percent of GDP.

Hu, who was a senior partner at Goldman Sachs, told the South China Morning Post that the mainland isn't facing a debt crisis in the near term and brushed off worries about local government debt as overblown.

On Tuesday, the International Monetary Fund cut China’s growth forecast for the world’s second-largest economy to 7.75 percent from its prior estimate of 8 percent, citing global economic recovery concerns and also warned about its rising debt levels.

Meanwhile, China continues to expand at an annual rate of more than 7 percent, and it has trillions of dollars in net assets to manage its growing debt burden.

"For a growing economy, debt-GDP ratio is not a fixed one. It's dynamic. Italy or Spain, why are they in trouble? It's because their economy is shrinking and they have heavy debt. I think 60 to 65 percent is a level that China can manage comfortably," Hu said.