Yin Zhongqing, deputy director of the National People’s Congress’s financial and economic affairs committee, warned on the vulnerability of Chinese public debt; particularly for Xiong county in Hebei province, where some of Beijing’s “non-capital” government functions and industries will be relocated. Furthermore, according to Yin, Beijing’s official figures for local government debt – 16.5 trillion yuan (US$2.6 trillion) as of the end of last year – could be underestimates.
It is probable that government assessments put the size of “hidden and disguised” local government debt at “at least 20 trillion” and the percentage of non-performing loans in China’s banking system at the end of last year was much higher than the official 1.74 per cent.
According to Yin, the problem was created by the excessive printing of money in the past decade: “It is like a river hanging over our heads – if there’s a leak, it will drown us. As the Chinese saying goes, sickness descends like a landslide, but goes away slowly like spinning silk” he said.
On totally different opinion is Zhou Xiaochuan, outgoing central bank chief, according to which China had brought its debt problem under control because the money supply rate was lower. But Yin insists by saying that the local government debt situation “is even more dangerous than before because they [liabilities] have been covered up” in forms such as equity investment or state-owned enterprise debt.
“There are many risks, but the focus is on financial risk. Financial risk is the biggest risk and can lead to the worst possible result. When we are talking about systemic risks, we are talking about financial risks; when we are talking about preventing risks, we mean a financial crisis must be avoided.” Yin said.
The Chinese leadership led by Xi is doing its part rallying a powerful state machine, including its police force. The aim is to fix financial loopholes and, from 2015, many tycoons were detained and arrested and to heavy borrowers were ordered to repay debts.
To eliminate the danger of debt, China Insurance Regulatory Commission and the China Banking Regulatory Commission will be merged into one regulator as part of a sweeping government restructure. To these measures Yin sees favourably, but he warned that: “Major regulators should prevent jumping on tough measures at the same time because the policy overlap could generate new risks”.