China’s debt looks respectable at 15 per cent of GDP, on par with hydrocarbon-rich Qatar. But add in heavy borrowing by local governments and other state-controlled entities, plus the cost of funding pensions for its aging population, and Beijing's obligations could nudge 130 per cent of GDP. While Chinese politicians like to chide the West for fiscal irresponsibility, there is a risk that soaring credit in the state-dominated economy could land on their own doorstep.
The issue is “contingent liabilities” – debts not yet on the balance sheet, but that could pop up later. In China, these add up fast. The central government owes only about $1-trillion (U.S.) directly. That's just 15 per cent of what the IMF estimates China's fast-growing GDP will reach this year. But that doesn't include $985-billion in bonds from state-owned development banks. Add in bonds sold by the central bank, debts owed by the Ministry of Railways, which can issue its own debt, and money still owed from bailing out China’s banks in the late 1990s, and government debt rises to 43 per cent of GDP.
Then there's provincial and local governments, which have borrowed heavily and arguably cannot be allowed to fail. After a frenzy of construction, they now owe roughly $1.67-trillion. Companies too have taken on debt hand over fist, which is not the government’s problem today. But if loans go bad, the banking sector may need a bailout. Fitch estimates bad loans could cost perhaps 20 per cent of GDP to mop up, though that includes local government debt too. Strip out provincial non-performing loans to avoid double-counting, and Beijing could need to stump up an extra 12 per cent of GDP.
The biggest bill facing Beijing may be the one few people are talking about: paying pensions to the roughly 164 million Chinese who by 2020 will be older than 65. The IMF puts China’s contingent debt at 68 per cent of GDP. Subtracting from that the cost of China’s past and potential bank bailouts, that leaves an unfunded pension liability of almost half of GDP. All in all, that means China faces commitments of $8.9-trillion, or 129 per cent of its GDP – almost nine times what Beijing has borrowed so far. If economic growth fails to keep up and loans go bad, China may find the West's debt troubles all too familiar.