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China will not suffer from debt crisis, expert says

Updated: Jun 16,2016 5:21 PM

At a press conference of the State Council Information Office on June 15, Li Yang, an expert from the Chinese Academy of Social Sciences (CASS), said, “China’s debt is controllable, and the government has enough assets to handle debt risk.” He added that China would not suffer from a debt crisis.

As of the end of 2015, the total amount of China’s debt was 168.48 trillion yuan ($25.59 trillion), with a social leverage ratio of 249 percent, and the government debt ratio was about 40 percent, according to research from a national finance and development laboratory under CASS.

Li said that even taking the debt of local governments’ financing platform into account, the amount of total government debts at the end of 2015, reaching 56.8 percent, was still below the warning line of 60 percent set by the European Union.

In contrast, the current debt ratio of the Japanese government has surpassed 200 percent, and that of the US government and French government is over or around 120 percent.

Referring to the market worries about local governments’ debt, Li explained that debt ratio is a key factor in evaluating whether local governments can pay their debts. In 2015, the debt ratio of Chinese local governments was 89.2 percent, which is below the international warning line.

However, he emphasized that the debt problem of Chinese enterprises should be paid close attention. Data shows that the debt ratio of non-financial enterprises reached 131 percent by the end of 2015. If added to the debt of their financing platforms, the ratio was as high as 156 percent. And the debts of State-owned enterprises account for a major part of the total.

Apart from debt itself, assets should also be taken into consideration when evaluating debt risk. Li Yang says China has enough assets to handle the risk and avoid a debt crisis.

According to CASS’s research, calculated in the wide range, the net value of Chinese sovereign assets was 103.3 trillion yuan ($15.7 trillion) in 2014. And if calculated in the narrow range, the net value still reached 28.5 trillion yuan ($4.3 trillion).

In addition, Li said that the high savings ratio in China is helpful in solving the debt problem. Every year, the amount of savings that are transformed into investment is equal to 50 percent of GDP. The high savings ratio means the debts can be handled smoothly.

And, unlike many other countries, the debts of Chinese governments are mainly used for investment. “So, local governments have a large number of quality assets, which is the solid guarantee for future repayment,” Li added.

In terms of the solution to the debt problem, Li Yang said the key factor is to eliminate non-performing assets. Those assets are excess capacity and inventory in the real economy. So the essence of the solution is to upgrade the economic structure.

He also pointed out that the debt problem is closely connected to the reform of State-owned enterprises, the development of the market and rule of law and financial reform in China.

“Stakeholders, including the financial sector, National Development and Reform Commission, banks and others, should work together to solve this problem in order to set a solid foundation for future development,” he said.