中国：永不破裂的泡沫

书籍信息

Author: Thomas Orlik
Published: 6 July 2022
Online ISBN: 9780197710012
Print ISBN: 9780197598610
Publisher: Oxford University Press
https://academic.oup.com/book/43774

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第二章 中国的债务山：借款人

在中国，没有几个地方比辽宁省更能体现政府的效率低下和功能失调——该省位于中国东北部的铁锈地带（Rust Belt），人口4400万。

2016年5月，辽宁省陷入困境的国有企业——东北特钢集团，与其债权人之间的会议进行得并不顺利。也许是将三家拥有百年历史的钢铁厂（大连钢铁集团、抚顺特钢集团、北满特钢集团）焊接在一起创建东北特钢集团的决定是错误的。也许是管理层决定在已经饱和市场中进一步扩大产能的决策并不明智。无论出于何种原因，东北特钢的处境每况愈下。2016年3月，董事长杨华被发现吊死在家中——这显然是自杀。几天后，该公司违约了8.52亿元的债券支付——这是价值72亿元的一系列未付债券中的第一笔。现在，辽宁省政府正试图强迫东北特钢的债权人——各种银行和债券持有人——同意一项协议，将他们的贷款换成股权。很少有人愿意持有这家公司的股份，该公司没有利润且前景渺茫。尽管提出了这笔交易，但政府并没有出席会议，东北特钢的新任董事长也没有出席。这引发了一个尖刻的问题：“你们的新董事长也死了吗？”

债权人，其中包括中国最大的几家银行，对此感到恼火是可以理解的。向国有工业企业发放的贷款本应是最安全的。如果国有企业无法用自己的收入偿还贷款，它们可以出售资产。如果资产出售失败，地方政府将承担贷款。现在，这两个安全措施都失败了。东北特钢已违约。债权人发表声明，指责“辽宁省政府不作为”，并呼吁抵制该省发行的债券。在中国这样一个在幕后达成交易、失败者默默忍受委屈的体制中，这种公开抗议是不同寻常的。它并没有给债权人带来任何好处。2017年8月，一项重组计划获得批准。债权人获得了债权总额的22%的补偿，即22美分兑1美元，或者按照中国背景来说，是22分人民币兑1元人民币。

像东北特钢这样的企业是中国经济借贷中的最大头。根据国际清算银行的数据，2016年末中国的企业债务为118.5万亿元，相当于GDP的160.5%。即使是这个天文数字，也可能低估了实际的借贷水平：

• 从2012年左右开始，中国的银行开始积极地将贷款从资产负债表中剔除。将贷款重新归类为投资产品，使银行能够规避对贷款与资本比率的监管控制，以及旨在切断向负债过多或产生过多污染的企业提供资金的政策运动。瑞士投资银行UBS的分析师仔细研究了237家贷款机构的2016年财务报告，发现影子贷款约为14.1万亿元（约占GDP的18.9%），高于2011年的不到1万亿元。
• 信贷条件收紧迫使资金紧张的公司放慢了账户结算速度——先偿还银行贷款，然后再偿还供应商的账单。中国大型工业企业的应收账款在2016年上升至约12.7万亿元（占GDP的17%），高于2011 年的7.1万亿元。

再加上从非正规贷款人那里借来的几万亿元——从P2P贷款平台到高利贷放贷者，五花八门——实际企业债务水平可能接近GDP的200%。

假设国际清算银行的数据是正确的，中国的企业债务已经敲响了警钟。如图2.1所示，与主要发达经济体和新兴经济体相比，中国的企业债务规模非常高，已经超出了图表范围。2016年底，美国和日本的企业债务分别占GDP的72%和99.4%。而其他新兴市场，包括巴西、俄罗斯、印度和南非（与中国合称为金砖国家）的平均企业债务水平仅为GDP的44.4%。

在中国，企业债务总额达到了GDP的160.5%，其中，像东北特钢这样的国有企业借款占了很大一部分。根据国家统计局的数据，截至2016年，国有工业企业的借款总额约占GDP的67%。国际货币基金组织估计这一比例为74%。实际总额可能更高。正如研究公司Gavekal Dragonomics的中国专家指出的那样，应付账款的大部分是国有企业拖欠民营供应商的账单，这是国有部门隐藏的债务堆积（也是对等待付款的民营企业的一种隐性税收）。

国有企业的高负债是一个问题。鉴于它们在中国经济中的特殊作用，这并不奇怪。国有企业平滑经济增长的起伏，推动政府的发展战略，并为领导人提供庇护机会。在第一种情况下，这意味着充当最后贷款人，在民营企业变得谨慎时，通过开工建设新项目来保持经济增长的车轮运转。在第二种情况下，这意味着借钱来支付优先基础设施和工业产能的建设，包括钢铁厂、铝冶炼厂、电力和电信网络，以及将产品推向市场所需的公路、铁路和港口。这种建设是资本密集型的，因此承担主导角色的国有企业背负了沉重的债务负担。

这种特殊角色意味着国有企业可以获得贷款来执行优先项目，无论这些项目是否会盈利。“我们是国有的，”天津附近一个工业园区价值数十亿元的燃气发电项目经理说，“所以我们是否赚钱并不重要。”如果收入不足以支付还款，贷款就会被展期，或者政府支持者会提供额外支持。自2015年4月电力设备生产商保定天威获得首家国有企业债务违约的“殊荣”以来，其他一些企业也出现了债务违约，包括东北特钢的崩溃。即便如此，从银行的角度来看——中国几乎所有银行也都是国有的——向国有家族内的其他成员提供贷款似乎是一个安全的赌注。

如果借贷是推动发展和管理经济周期起伏所必需的东西，那么将杠杆率的累积集中在企业部门是最不坏的选择。当家庭过度借贷时，就像金融危机前的美国一样，结果就是郊区到处都是豪宅。如果政府借钱来支付消费，就像欧洲债务危机前的希腊一样，结果就是公共部门工资和福利支出不堪重负。通过向企业提供贷款来维持增长，至少在潜在意义上是不同的。中国企业利用借来的资金投资于基础设施和工业产能等资本存量，扩大了经济的增长潜力。2008年中国的资本存量与20世纪50年代的美国大致相同。从一个较低的基数开始，中国企业有很好的机会进行生产性投资，产生可用于偿还借款的回报。

理论上是这样。但在实践中，情况并非如此。事实上，从2008年底开始的飞速投资增长，加上流向效率低下的国有企业的信贷份额过大，必然会导致严重的资本错配。这是一个熟悉的循环。廉价信贷推动激进投资。激进投资导致产能过剩。产能过剩意味着价格和利润下降。在经济上升时期享受借款资金的首席执行官们发现，在经济下行时期偿还债务很困难。道德风险（Moral Hazard）使问题变得更加复杂。假设财力雄厚的政府支持者总是会偿还对国有企业的贷款。由于违约的可能性很低，信贷定价过低，分配过于草率。

中国一家商业化程度较高的银行的区域经理解释了贷款决策是如何做出的。“首先，我们看看中央政府的计划是什么，”他说，“然后我们确定哪些地方项目符合这些计划，这就是我们发放贷款的地方。”这被当作一种对业务的直接解释，而不是对不良贷款行为的供词，它表明了道德风险如何渗透到中国的金融体系中。贷款评估过程与对风险和回报的精确计算毫无关系，而是与对哪些项目得到了中央政府的支持的“马屁精”调查有关，因此这些项目将免于违约。

钢铁行业说明了中国信贷周期的腐蚀性影响。从2007年到2014年，在东北特钢等企业的推动下，钢铁生产投资增长了80%。需求的增长幅度要小得多。由此产生的产能过剩导致价格下跌70%，将利润转变为亏损，并将生产商推向破产边缘。根据官方数据，不良贷款率保持在较低水平。根据另一种计算方法，基于没有足够收益来支付利息的企业所承担的债务份额，2015年金属和其他基础资源企业的不良贷款率为46%。该行业近一半的债务来自那些没有足够收益来支付贷款利息的企业，更不用说偿还本金了。

由普遍的道德风险支撑的迅猛贷款增长问题并非中国独有。

• 在20世纪80年代的日本，大型银行是“金融系列”的核心，银行和公司之间相互持股和贷款。人们认为，这种相互持股和贷款的连锁网络可以防止违约。事实上，虽然它确实有助于平滑商业周期的波动，但它也鼓励信贷员对风险视而不见，允许贷款增长过快，并阻止银行终止失败的项目。
• 在20世纪90年代的韩国，大型企业集团（称之为财阀）在执行政府产业战略方面发挥了关键作用。作为回报，他们获得了针对违约的隐性担保，使他们能够以极低的价格获得贷款。当金融放松管制削弱了贷款纪律时，结果是大量债务积累，其中大部分资金浪费在了华而不实的项目上。
• 在21世纪初的美国，抵押贷款增长过快，其中大部分流向了还款能力有限的家庭——向“无收入、无工作、无资产”的借款人发放的NINJA贷款。这种纸牌屋的基础是：政府支持抵押贷款巨头房利美和房地美，这使他们能够以低成本借款，囤积高风险贷款，并在资本缓冲不足的情况下运营。

它们很少有好的结局。1989年日本泡沫经济破灭、1997年韩国金融危机以及美国次贷危机都源于贷款增长过快和道德风险这两个问题。中国国有部门不同之处在于规模更大。如图2.2所示，中国国有企业的收入高于德国的GDP。如果中国国有企业步履蹒跚，超出了政府支持它们的能力，后果也将更加严重。

中国希腊悲剧——地方政府债务累积

一位隶属于中国国家发展和改革委员会的经济学家表示，中国的各个地方政府就像“许多个小希腊”。尚不清楚他指的是希腊的高负债，还是让欧洲经济陷入危机的虚假预算数字。对于辽宁来说，这两者都正确。

辽宁与吉林和黑龙江一起构成了中国东北的老工业基地（Rust Belt），在毛泽东时代，它们被称为“共和国长子”，反映了其在加快工业化进程中的核心作用。快进半个世纪，它看起来更像一位年迈的亲戚。2016年，即东北特钢违约的那一年，辽宁经济萎缩2.5%，是表现最差的省份。投资支出暴跌63.5%。税收收入——政府本可用于救助陷入困境的企业的资金——勉强实现了增长。即使是这些可怕的数字，也值得怀疑。中国审计人员指责辽宁省政府“猖獗”的夸大其词，其中包括将财政收入夸大了至少20% 。

对辽宁省政府财政来说，问题的开始可以追溯到2008年11月。当时，为了应对雷曼兄弟破产和2008年金融危机爆发，时任总理温家宝承诺提供4万亿元人民币的刺激计划，以保持中国经济增长。对温家宝来说，他将被人们记住，这是他最辉煌的时刻，因为他指出了中国经济的问题，但他没有找到必要的解决方案。4万亿元人民币的刺激计划令市场惊叹，使中国经济免于衰退，并强化了这样一种观念，即中国的威权模式（Authoritarian Model）是西方民主国家陷入困境后的一种可行的替代方案。

对辽宁省和其他省份来说，麻烦在于温家宝只支付了总额中的1.2万亿元人民币。地方政府要承担其余部分。在辽宁，借款填补了这一缺口。2009年9月访问辽宁时，温家宝表示，刺激计划旨在解决中国短期和长期的问题，即提振需求和解决对信贷推动的投资的不平衡依赖。“我们已经做出了积极努力来刺激消费，”他说，“‘使’国内需求，特别是消费支出成为经济增长的主要驱动力。”现实情况却大不相同。以债务为资金的基础设施和工业产能建设使经济增长的车轮继续运转。辽宁的刺激计划中几乎没有支持向消费再平衡的必要措施。到2016年，刺激计划结束，基础设施项目的回报率很低，工业企业（现在生产的产品超过了销售能力）面临着越来越多的亏损，审计人员开始指责省领导人数据造假。

早在2010年，该省审计人员就发现，85%的地方政府融资平台（通过这些空壳公司借入刺激资金）的收入不足以支付债务。到2016年，对债券招股说明书的调查发现，辽宁省地方政府融资平台的平均资产回报率仅为1%。对企业资产负债表的自下而上调查发现，约10%的借款人的收入不足以支付贷款利息。刺激资金在经济低迷时期支撑了增长。但它们没有创造足够的创收资产来偿还即使是折扣率最高的贷款。

中国政府有多少债务？根据财政部的数据，截至2016年底，政府债务总额仅为27万亿元人民币，占GDP的37%。这一水平的公共债务看起来是可以控制的。美国（107%的GDP）、日本（236%）和德国（68%）等主要发达经济体的负担通常要大得多，而且通过增长摆脱困境的空间也要小得多。巴西（78%）和印度（69%）等主要新兴市场也相形见绌。

问题是，37%是否准确反映了中国政府的债务负担？答案是否定的。财政部对官方借款采用了狭义定义，仅包括中央政府债务和中央政府已承担责任的地方政府债务的一部分。一个完整的核算应该包括地方政府的表外借款，以及为主要基础设施项目提供资金的政府所有的政策性银行发行的债券。再加上东北特钢和其他19272家大型国有企业的借款、公共养老金体系中未备资金的负债以及银行资本重组的潜在成本，这一数字还会更高。

中国政府隐藏债务的最大部分——地方政府的表外负债——的解释，在于中国政治中一个重要的动态：北京与省会城市之间的控制权之争。从外部看，习近平主席坐镇的中南海领导集体，似乎拥有贯穿省、县、镇直至最小村庄的权力。但现实情况是，正如中国一句谚语所说，“上有政策，下有对策”。中国的政治不是严格的等级制度，而是中央和地方各省之间争夺控制权的斗争。难怪当时的国家主席胡锦涛的第一个反腐败的对象是叛逆的上海市市委书记，而习近平的反腐败运动致使中国的31个省份出现了一批新的忠诚的党委书记。

中央与地方之间斗争的核心是预算控制权。1994年，时任副总理朱镕基担心中国的改革剥夺了中央政府有效行使控制权所需的资金，于是重新调整了税收和支出的责任。地方政府承担了支付社会服务的负担。北京则攫取了大部分税收。地方干部在收入来源减少和支出义务扩大的夹缝中，不得不寻找一种收支平衡的方法。房地产热潮的开始，加上国家对土地所有权的垄断，提供了一个丑陋但有效的解决方案。政府向房地产开发商出售土地成为资金的主要来源。与此同时，资产负债表表外的融资工具的创建，使地方政府能够逃避中央对直接借款的控制，从银行获得信贷。

典型的账外借贷结构是这样的：地方政府将土地和其他有价值的资产注入一个表外融资工具，并隐含地承诺为任何债务提供担保，从而能够以低于市场利率借款。借来的资金用于支付城市发展项目，包括新的道路、水处理厂、旅游区和经济适用房。如果项目进展顺利，它们就会产生收入，资产负债表上其他土地的价值也会上升，从而能够偿还借款。如果项目进展不顺利，地方政府就必须介入并提供更多支持，注入更多可以出售以偿还贷款的资产。这一体制框架自1990年代以来一直存在，但直到2008年底金融危机爆发，地方官员才测试其潜力的极限。

原文

In few places are China’s inefficiencies and dysfunctions more evident than Liaoning—a province of 44 million in the rustbelt northeast of the country.
It is May 2016, and the meeting between Dongbei Special Steel Group—one of Liaoning’s struggling state-owned enterprises—and its creditors is not going well. Perhaps the decision to create the Group by welding together three hundred-year-old steel plants was ill advised. Maybe management’s decision to expand capacity into a saturated market was unwise. Whatever the reason, Dongbei has seen better days. In March 2016, Chairman Yang Hua was found hanged in his home—an apparent suicide. Days later, the firm defaulted on an 852-million-yuan bond payment—the first of a series of missed payments on bonds worth 7.2 billion yuan. Now the Liaoning government is trying to strong-arm Dongbei’s creditors—an assortment of banks and bond holders—to agree to a deal, swapping their loans for an equity stake. Few want shares in a firm with no profits and little prospect of any. Despite proposing the deal, the government hasn’t shown up to the meeting. Neither has Dongbei’s new chairman, prompting a caustic query: “Is your new chairman dead too?”
Creditors, among them China’s biggest banks, are understandably irked. Loans to state-owned industrial firms are meant to be the safest of the safe. If state firms can’t make repayments from their revenue, they have assets that can be sold. If asset sales fall through, the local government stands behind the loan. Now both of those fail-safes had failed. Dongbei is in default. The creditors issue a statement, blaming the “inaction of the Liaoning provincial government” and calling for a boycott of bonds issued by the province. In a Chinese system where deals are cut behind closed doors and losers nurse their grievances in silence, that public outcry was unusual. It didn’t do the creditors any good. In August 2017, a restructuring plan was approved. Creditors got 22 cents on the dollar, or fen on the yuan, in the Chinese context.
It is corporations like Dongbei Special that account for the lion’s share of borrowing in China’s economy. Based on Bank for International Settlements data, China’s corporate debt at the end of 2016 was 118.5 trillion yuan, equal to 160.5 percent of GDP. Even that astronomical number likely understates the true level of borrowing:
Starting around 2012, China’s banks began aggressively moving loans off the balance sheet. Reclassifying loans as investment products enabled them to dodge regulatory controls on loan-to-capital ratios, as well as policy campaigns aimed at cutting off funds to firms operating with too much debt, or producing too much pollution. Poring through 2016 financial reports from 237 lenders, analysts at Swiss investment bank UBS found some 14.1 trillion yuan in shadow loans (equal to about 18.9% of GDP), up from less than a trillion yuan in 2011.
Tighter credit conditions have pushed cash-strapped firms into slower settlement of accounts—repaying loans from banks ahead of bills from suppliers. Accounts receivable for China’s big industrial firms rose to about 12.7 trillion yuan in 2016 (17% of GDP), up from 7.1 trillion yuan in 2011.
Throw in a few trillion yuan in borrowing from informal lenders—a motley crew ranging from peer-to-peer lending platforms to loan sharks—and the actual level of corporate debt could be closer to 200 percent of GDP.

Figure 2.1 Corporate Debt as Percentage of GDP for China and Other Major Economies
Source: Bank for International Settlements.

Even assuming the Bank for International Settlements number is correct, China’s corporate debt rings alarm bells. As figure 2.1 shows, in international comparison it’s a very high number—off the scale relative to both major developed and emerging economies. Corporate debt in the United States and Japan ended 2016 at 72 percent of GDP and 99.4 percent of GDP, respectively. Looking at other emerging markets, the average for Brazil, Russia, India, and South Africa—which together with China make up the BRICS—was just 44.4 percent of GDP.
Within China’s 160.5 percent of GDP total for corporate debt, borrowing by state-owned firms like Dongbei Special accounts for an outsize share of the total. Based on National Bureau of Statistics data, as of 2016 total borrowing for state industrial firms was about 67 percent of GDP. The International Monetary Fund put it at 74 percent of GDP. The real total might be higher still. As the China experts at research firm Gavekal Dragonomics note, the bulk of accounts payable represents bills owed by state firms to their private-sector suppliers—a hidden debt pile for the state sector (and a hidden tax on private firms waiting to be paid for their work).
High debt for state firms is a problem. Given the special role they play in China’s economy, it’s not a surprise. State firms smooth the ups and downs of growth, drive the government’s development strategy, and provide patronage opportunities for leaders. In the first case, that means acting as the borrower of last resort, keeping the wheels of growth turning by breaking ground on new projects when private firms have turned cautious. In the second, it means borrowing to pay for the buildout of priority infrastructure and industrial capacity—steel mills, aluminum smelters, electricity and telecom networks, and the roads, rails, and ports necessary to take products to market. That buildout was capital-intensive, and so the state firms that took the lead role took on a heavy burden of debt.
That special role means state firms get loans to carry out priority projects—whether or not they will generate a profit. “We’re state-owned,” said the manager of a multibillion-yuan gas–power project in an industrial park near the northern metropolis of Tianjin, “so it doesn’t matter if we make any money.” If revenue isn’t sufficient to cover repayments, loans get rolled over, or government backers provide additional support. Since April 2015, when power equipment producer Baoding Tianwei gained the dubious honor of first default by a state-owned firm, there has been a trickle of other missed payments—including the Dongbei debacle. Even so, from the perspective of the banks—almost all of which are also state-owned—loans to other parts of the family look like a safe bet.
If borrowing is required to drive development and manage the ups and downs of the economic cycle, concentrating the buildup of leverage in the corporate sector is the least bad option. When households borrow too much, as in the United States ahead of the great financial crisis, the result is McMansion-littered suburbia. If government borrows to fund consumption, as in Greece ahead of European debt crisis, the result is an unsupportable burden from public-sector wages and welfare payments. Sustaining growth with loans to businesses is—at least potentially—different. China’s firms used their borrowing to fund investment in the capital stock—infrastructure and industrial capacity—expanding the economy’s growth potential. China’s capital stock in 2008 was about the same level as the United States in the 1950s. Starting from a low base, China’s corporates had a decent shot atmaking productive investments, generating returns that could be used to repay borrowing.
That’s true in theory. In practice, it didn’t work out that way. Indeed, the breakneck investment growth that began at the end of 2008, combined with the outsize share of credit directed to inefficient state firms, was bound to result in serious misallocation of capital. The cycle is a familiar one. Cheap credit drives aggressive investment. Aggressive investment results in excess capacity. Excess capacity means that prices and profits fall. Chief executives who enjoyed spending borrowed funds on the way up find that repayment is difficult on the way down. The problem of moral hazard—the assumption that deep-pocketed government backers will always repay loans to state-owned firms—compounds the difficulty. With the chances of default low, credit is priced too cheaply and allocated too carelessly.
The regional manager of one of China’s more commercially oriented banks explained how lending decisions were made. “First we look at what the central government’s plans are,” he said, “then we work out which local projects fit into those plans—that’s where we make our loans.” That—offered as a straightforward explanation of operations rather than a confession of poor practice—shows how moral hazard permeates China’s financial system. The loan assessment process had nothing to do with hard-nosed calculation of risk and return, everything to do with brown-nosed investigation of which projects had the backing of Beijing, and so would be immune from default.
Steel illustrates the corrosive impact of China’s credit cycle. From 2007 to 2014, driven by firms like Dongbei Special, investment in steel production rose 80 percent. Demand managed a much smaller increase. The resulting overcapacity triggered a 70 percent drop in prices, turning profits into losses and pushing producers toward bankruptcy. According to the official data, bad loans stayed low. Using an alternative calculation, based on the share of debt taken on by firms without enough earnings to cover their interest payments, in 2015 the bad loan ratio for metals and other basic resources firms was 46 percent. Almost half of debt in the sector was with firms that didn’t have enough earnings to cover interest payments on their loans, let alone repay principal.

Figure 2.2 Revenue for China State Firms s vs. GDP for Major Economies
Source: National Bureau of Statistics, IMF.

The problem of torrid loan growth underpinned by pervasive moral hazard is not unique to China.
In Japan in the 1980s, major banks were at the center of “financial keiretsu,” with cross-holdings of stocks and lending between bank and corporations. The interlocking network of cross-ownership and lending was thought to be a guarantee against default. In fact, while it did help smooth out bumps in the business cycle, it also encouraged loan officers to turn a blind eye to the risks, allowing lending to rise too fast and preventing banks from pulling the plug on failed projects.
In South Korea in the 1990s, massive conglomerates—known as chaebols—played a critical role in executing the government’s industrial strategy. In return, they received an implicit guarantee against default, enabling them to tap loans at bargain rates. When financial deregulation eroded lending discipline, the result was a massive accumulation of debt, much of it wasted on vanity projects.
In the United States in the 2000s, mortgage lending rose too quickly, much of it channeled to households with limited capacity to repay—the NINJA loans to borrowers with “No Income, No Job, and No Assets.” The foundation for that house of cards: government backing for giant mortgage financers Fannie Mae and Freddie Mac, which enabled them to borrow cheaply, stock up on high-risk loans, and operate with insufficient capital buffer.
It seldom ends well. The collapse of Japan’s bubble economy in 1989, Korea’s 1997 crisis, and the US subprime meltdown all found their origin in the twin problems of rapid loan growth and moral hazard. The difference in the case of China’s state sector is that it’s bigger. As figure 2.2 shows, revenue for China’s state-owned firms is larger than the GDP of Germany. If China’s state-owned firms stumble beyond the ability of the government to support them, the consequences will be bigger, too.
China’s Greek Tragedy—Adding Up Local Government Debt
China’s local governments, said an economist attached to the powerful National Development and Reform Commission, are like “lots of little Greeces.” It’s not clear if the reference was to Greece’s high debt or to the fake budget numbers that tipped the European economy into crisis. In the case of Liaoning, both would be correct.
In Mao’s time, Liaoning—which together with Jilin and Heilongjiang makes up China’s northeastern rustbelt—was dubbed the “the eldest son of the republic,” a reflection of its central role in efforts to accelerate industrialization. Fast-forward half a century and it looked more like an elderly relative. In 2016, the year of Dongbei Special’s default, Liaoning’s economy contracted 2.5 percent—the worst-performing province by a wide margin. Investment spending plunged 63.5 percent. Tax revenue—funds the government could have used to bail out its troubled enterprises—barely eked out an expansion. Even those dire numbers are open to question. China’s auditors called out the Liaoning government for “rampant” exaggeration, including overstatement of fiscal revenue by at least 20 percent.
For Liaoning’s government finances, the beginning of the problem could be traced back to November 2008. It was then, responding to the collapse of Lehman Brothers and the start of the great financial crisis, that Premier Wen Jiabao promised a 4-trillion-yuan stimulus to keep China’s growth on track. For Wen—who will be remembered for pinpointing China’s economic problems but not nailing the needed solutions—it was his finest hour. The 4-trillion-yuan stimulus wowed the markets, saved the economy from recession, and reinforced the notion that China’s authoritarian model was a viable alternative to the mess Western democracies found themselves in.
The trouble for Liaoning, and other provinces up and down the country, was that Wen only forked out 1.2 trillion yuan of the total. Local governments were on the hook for the rest. In Liaoning, borrowing filled the gap. On a trip to the province in September 2009, Wen said the stimulus was aimed at solving China’s short- and long-term problems—boosting demand and tackling the unbalanced reliance on credit-fueled investment.“We have made vigorous efforts to stimulate consumption,” he said, “[making] domestic demand, particularly consumer spending the primary driver of economic growth.” The reality was rather different. Debt-financed buildout of infrastructure and industrial capacity kept the wheels of growth turning. There was little in Liaoning’s stimulus that supported the needed rebalancing toward consumption. By 2016 the stimulus was over, returns on infrastructure projects were low, industrial firms (now producing more than they could sell) faced mounting losses, and the auditors were calling out provincial leaders for their fake data.
Already in 2010, the province’s auditor found that 85 percent of local government financing vehicles—the shell companies through which stimulus funds were borrowed—had insufficient income to cover their debt payments. By 2016, a trawl through bond prospectuses found that, on average, Liaoning’s local government financing vehicles had return on assets of just 1 percent. A bottom-up look at corporate balance sheets found that about 10 percent of borrowers had insufficient income to cover interest payments on their loans. Stimulus funds had buoyed growth through the downturn. They had not created enough revenue-generating assets to repay even the most heavily discounted loan.
How much debt does China’s government have? According to the Ministry of Finance, total government debt at the end of 2016 was just 27 trillion yuan, or 37 percent of GDP. Public debt at that level looks manageable. Major developed economies like the United States (107 percent of GDP), Japan (236 percent), and Germany (68 percent) typically have a much larger burden, and considerably less scope to grow their way out of difficulties. Major emerging markets like Brazil (78 percent) and India (69 percent) also compare unfavorably.
The question is, does 37 percent represent an accurate picture of China’s government debt burden? It doesn’t. The Ministry of Finance adopted a narrow definition of official borrowing including only central government debt, and the fraction of local government debt for which the central government has accepted responsibility. A complete accounting would include off-balance-sheet borrowing by local governments, and bond issuance by the government-owned policy banks that finance major infrastructure projects. Adding in borrowing by Dongbei Special and China’s 19,272 other big state-owned enterprises, unfunded liabilities in the public pension system, and the potential cost of recapitalizing the banks would push the number higher still.
The explanation for the biggest chunk of hidden government debt—off-balance-sheet liabilities for local government—lies in an important dynamic in China’s politics: the struggle for control between Beijing and provincial capitals. From the outside, it looks like President Xi Jinping, ensconced in his Zhongnanhai leadership compound, has a writ that runs down through province, county, and town to the smallest village. The reality, to quote a Chinese proverb, is that “the top has its measures, the bottom has its countermeasures.” Chinese politics is not rigidly hierarchical; it is a struggle for control between the center and the provinces. Small wonder that then-president Hu Jintao’s first anti-corruption scalp was the rebellious party boss of Shanghai, and that Xi’s anti-corruption crackdown resulted in a new roster of loyalist party secretaries across the thirty-one provinces.
Central to that struggle between the center and the provinces: control of the budget. In 1994, fearing that China’s reforms had stripped central government of the funds it needed to exercise effective control, then–vice premier Zhu Rongji realigned responsibility for taxing and spending. Local governments were left carrying the burden of paying for social services. Beijing grabbed the lion’s share of the tax take. Caught between diminished revenue streams and expanding spending obligations, local cadres had to find a way to make ends meet. The beginning of a real estate boom, combined with a state monopoly on ownership of land, provided an ugly but effective solution. Land sales by the government to property developers became a major source of funds. At the same time, the creation of off-balance-sheet financing vehicles allowed local governments to evade controls on direct borrowing, tapping the banks for credit.
A typical structure for off-the-books borrowing looks something like this. Local governments inject land and other valuable assets into an off-balance-sheet financing vehicle and implicitly promise to stand behind any debt, enabling borrowing at below-market rates. Borrowed funds are used to pay for urban development projects—ranging from new roads and water treatment plants to tourist zones and affordable housing. If the projects go well, they generate revenue and the value of the other land on the balance sheet goes up, enabling repayment of borrowed funds. If they go badly, the local government has to step in with more support—injecting additional assets that can be sold to make repayments. That institutional framework had been in place since the 1990s, but it was not until the great financial crisis hit at the end of 2008 that local officials tested the limits of its potential.
For local government budgets, 2009 was close to a perfect storm. On the revenue side, the crisis hammered income from tax and land sales. On spending, local treasuries had to finance their share of Wen’s 4-trillion-yuan stimulus, as well as increased social obligations. To fill the gap, they turned to borrowing. By the end of 2010, local government debt registered at 10.7 trillion yuan (26.1 percent of GDP), more than double its level two years earlier. By 2013, the last date for which comparable official data is available, the total had risen to 17.9 trillion yuan (29.9 percent of GDP). Even at that point, the official data—the results of an extensive trawl by the National Audit Office—likely understates the true debt level. In the years that followed, it definitely does.
In March 2016, then–minister of finance Lou Jiwei said that total local government debt at the end of 2015 was just 16 trillion yuan—some 1.9 trillion yuan lower than it had been two years earlier. Given that both bond issuance by local financing vehicles and infrastructure spending financed by them had continued unabated, a drop in debt appears implausible. The likely explanation: under pressure to contain the problem without denting growth, officials had resorted to an accounting trick—reclassifying a chunk of local government debt as corporate debt. How high had debt actually risen? Diving into the balance sheets of local financing vehicles, a team of academics led by People’s Bank of China advisor Bai Chong’en has a stab at the answer. They estimate the stock of local government debt in 2015 at about 45 trillion yuan (64 percent of GDP).
Local debt isn’t the only omission from China’s government balance sheet. The policy banks—China Development Bank, Agricultural Development Bank, and China Export Import Bank—are immense, state-owned, and borrow extensively from the bond market to fund their operations. To get a complete picture of China’s government debt, their borrowing has to be added to the total. At end 2016, China’s three policy banks had liabilities of 21.7 trillion yuan, or 29 percent of GDP. Adding up central government debt, local government debt, and borrowing by the policy banks puts China’s public debt at 130 percent of GDP in 2016. That’s a troubling level. It places China’s public debt in the range of major developed economies, and above most major emerging markets.
There’s little consensus on the level at which government debt starts to be a problem. There is broad agreement on one point—higher is worse. Higher public debt means a heavier repayment burden. Funds that could have been used to pay for expanded provision of healthcare and education—a crucial underpinning of China’s promised transition to a consumer-driven economy—have to be used for debt servicing. Banks that could be making more loans to entrepreneurial start-ups, catalyzing China’s shift to a more dynamic, private-sector led growth model, find themselves using the funds to roll over loans to ailing government projects. In a downturn, financing a boost to growth from higher public spending or lower taxes is harder to do.
Worse, China’s debt was increasing at a torrid pace. The official data put the 2016 budget deficit at 3.7 percent of GDP. As with the Ministry of Finance’s take on the debt level, that reflects a strict definition of government borrowing. Taking account of off-balance-sheet borrowing, funds for infrastructure spending, and land sales, the International Monetary Fund calculated the “augmented deficit” at 10.4 percent of GDP. Deficit spending sustained at that pace would rapidly push China’s public debt to vertiginous levels. In their seminal study of financial crises, Harvard economists Carmen Reinhart and Kenneth Rogoff found that the relationship between debt and crisis runs in both directions. High debt causes crises, and crises result in higher debt. If China’s hidden government borrowing does trigger a meltdown, the public finances would go in weak, and come out weaker.
Ghost Towns, Real Debts: China’s Property Market
China’s state-owned enterprises and local governments are two legs of the rickety debt stool. The third is real estate.
The route along the high-speed rail from Zhengzhou, the capital of Henan province, to Luoyang, an industrial town ninety miles away, is crowded with property developments. Tower blocks rear out of the smog, in varying stages of undress. Some are little but a concrete shell, surrounded by scaffolding; others already have their skin of faux classical pillars and balustrades. They have one thing in common—little sign of life. Around the unfinished projects, there are no scurrying workers or clanking cranes. In the finished ones, no buyers throng the show rooms. That’s not for want of trying on the part of developers: “Free car with every 15 percent down payment,” proclaims the banner on one particularly forlorn-looking structure.
If buyers remain unenticed, there’s good cause. In the great financial crisis and the years that followed, Luoyang’s city government turned to property construction to buoy growth through the slump. With credit abundant and controls aimed at capping price rises stripped away, speculators drove demand higher. Sensing easy profits, developers started new projects. Industrial firms with no experience in property decided to get in on the action. The city government gave factories brownfield sites on the outskirts of town, encouraging them to vacate city-center plots to make way for new apartments and shopping malls. “You make a loan to an industrial firm to build a new factory, but the money ends up in real estate,” said a loan officer from one of the main local banks.
Mr. Guo, the vice president of a local real estate developer, sensed the turnaround at the start of 2009. “Normally February and March are the off season for sales,” he said. “This time, with supportive policies and government propaganda, buyers’ confidence has increased.”15 Mr. Guo had a gift for understatement. As the US financial crisis hammered exports, booming real estate provided needed stimulus. Between 2010 and 2011, land sales doubled. The result, a few years down the line: a city swamped in oversupply. As of the end of 2016, Luoyang, a town of 6.7 million, had 33.7 million square meters of residential property under construction—five square meters for every man, woman, and child in the town. With the market flooded, the boom was over. In 2016, with prices falling, developers cut new project offerings by more than a third.
As with all bubbles, China’s property bubble has a basis in fundamentals. Until the 1990s, there was no private housing market in China. Everyone from the Politburo Standing Committee in their leadership compound to the street cleaners in their dormitory lived in government housing. In the twenty years that followed the creation of the private market, the dilapidation of the public housing stock, millions of people per year migrating from the country to the city, and rapidly rising incomes for existing city dwellers drove huge demand. If construction had just kept pace, there would have been a major boom and no risk of a bust. The trouble is, even as demand was rising fast, supply rose faster.

Figure 2.3 Supply and Demand in China Real Estate
Source: Bloomberg Economics, National Bureau of Statistics

From 2010 to 2017, looking at China as a whole, construction ran at about 10 million new apartments a year. As shown in figure 2.3, demand from rural migrants, natural growth in the urban population, and depreciation of the existing urban housing stock was less than eight million units a year. In the gap between those two numbers: ghost towns of empty property, uninhabited tower blocks ringing every city, and the Luoyang developer’s desperate offer of a car with every down payment. In total, in 2016 there were about 12 million empty apartments in China—enough to house the entire population of Canada.
Two factors tipped China’s housing market from urbanization boom into ghost-town bubble. First, for mom-and-pop investors, real estate was the only show in town. Bank deposits, with their below-inflation returns, looked unattractive. The rollercoaster stock market, lurching between huge gains and massive losses, was too volatile to act as a store of value. Wealth management products—retail investments with some of the safety of a bank deposit but markedly higher returns—could ultimately be a game-changer, but so far haven’t slaked appetite for real estate. The result was intense speculative demand. According to the China Household Finance Survey—a large-scale national survey of saving and investment behavior—even as evidence of overbuilding grew, speculators accounted for about 30 percent of China home purchases.
Second, for China’s government, real estate is the ballast that keeps the economic ship afloat. That’s been true ever since the creation of the private housing market. In the late 1990s, China faced a twin challenge to growth. The Asian financial crisis hammered exports. Then-premier Zhu Rongji’s root-and-branch reform of the state sector triggered a wave of factory bankruptcies and a sharp rise in unemployment. Investment in real estate, combined with a substantial slug of infrastructure spending, helped put a floor under growth. It remained true in the stimulus that followed the great financial crisis, when mortgage rates were cut, down-payment requirements lowered, and administrative controls lifted with an eye toward securing sufficient property construction to keep growth on track.
All of that construction has come at a price. Based on data from the National Bureau of Statistics, total debt for real estate developers came in at about 48.9 trillion yuan at the end of 2016, up from 10.5 trillion in 2008. Mortgage lending—including loans from a government fund for homebuyers —rose fast as well, climbing to 27.9 trillion yuan in 2016, up from about 4.5 trillion yuan in 2008. Putting those numbers together, total lending to the real estate sector rose to 76.8 trillion yuan (103 percent of GDP) in 2016 from 15 trillion yuan (47 percent of GDP) in 2008.
Even those numbers very likely understate the depths of the debt hole. On the developer side, government attempts to cool prices locked smaller builders out of access to conventional sources of credit. With the front door to the banks closed, many made use of the side entrance. “About 90 percent of our off-balance-sheet loans are to real estate developers,” said one corporate loan officer at a major bank’s Henan head office. For others, it means paying high rates—typically above 10 percent—to borrow from shadow banks. According to the China Trustee Association, at the end of 2016 shadow bank loans to real estate developers came in at 1.4 trillion yuan. A final group raised funds by issuing dollar bonds offshore—combining a higher cost of credit and exchange rate risk if the yuan depreciates.
Looking at developers’ balance sheets, the signs of stress are clear. For China’s most highly-levered home builders, debt is so high it would take more than ten years of earnings to pay it off. For the banks, risks are compounded by the critical role of real estate in the wider economy, and as collateral across their loan book. Real estate and construction account directly for 13 percent of China’s GDP. Add in demand for steel, cement, home electronics, and furniture, and it’s probably close to 20 percent. Weakness in real estate also hammers land sales—the main source of revenue for local government borrowers. And by reducing the value of collateral it triggers margin payments on loans—risking a downward spiral or falling prices, fire sales of inventory, and further price falls. A slump in real estate could have systemic consequences.
In the history of financial crisis, real estate plays a prominent role:
In 1989, at the height of Japan’s property bubble, the land around the Imperial Palace was said to be more valuable than all of the real estate in California. Restrictions on bank loans to real estate developers were one of the catalysts for the bubble to burst, triggering a 72 percent drop in land prices and pushing Japan into a lost decade of stagnant growth and falling prices.
In 1997, with the Asian financial crisis poised to topple the region’s economies like dominoes, Thailand’s real estate bubble provided an early indication that something was amiss. Demand for office space in the capital, Bangkok, was running at less than half of construction.
In the United States in 2007, it was subprime mortgage lending that lit the fuse for the great financial crisis. Mortgage debt had risen to about 100 percent of GDP. “If you had a pulse, we gave you a loan,” said an employee at Countrywide—a mortgage broker whose reckless lending helped bring on the crisis.
No surprise then that China’s real estate sector has been a persistent focus of concern. “They can’t afford to get off this heroin of property development,” said Jim Chanos, the hedge fund manager who called the collapse of Enron back in 2001. “It’s the only thing keeping the economic growth numbers growing.”16 Not to be rhetorically outdone by a foreigner, former Morgan Stanley economist Andy Xie chimed in. China’s property investors were like “hairy crabs”—a Shanghai delicacy, best cooked in bamboo steamer baskets. “They will be cooked,” said Xie, “they just don’t know it yet.”
Reasons for Resilience
There were plenty of reasons for concern about the health of China’s borrowers. Getting less attention: the benefits of stimulus relative to the alternatives, the broader gains from infrastructure investment, and reforms that tilted the dial toward efficiency.
There’s a story, probably apocryphal, about a senior Chinese leader asked whether the short-term growth boost from stimulus was worth the long-term costs to the economy from increased reliance on credit-fueled investment. “A little bit more imbalance,” he is said to have responded, “is better than a lot of collapse.” There is a high cost to recession and financial crisis. Workers who lose their jobs take a permanent step back as skills atrophy. Businesses that go bankrupt don’t just spring back to life. The cost of failing banks, with their deep knowledge of what makes the local economy tick, is even higher—a point Ben Bernanke, chair of the Federal Reserve, made in his study of the Great Depression. China’s stimulus was overdone. The alternative —inadequate stimulus and recession—would have been worse.
With stimulus required, spending on investment was preferable to spending on consumption. Yes, a lot of the funds were wasted, but a lot were not. A study by the Chinese Academy of Social Science found that China’s government ended 2016 with net assets of 120 trillion yuan (about 161 percent of GDP), including its stake in state-owned enterprises. In a credit boom, asset values are inflated. In a credit bust, financial assets lose value and nonfinancial assets are difficult to sell. Still, a complete picture of China’s financial system has to consider the asset as well as the liability side of the balance sheet. China’s assets are probably not worth as much as the Chinese Academy of Social Science says they are. They are worth something, and taking that into account makes the debt problem less daunting.
A bean counting approach to the value generated by investments misses the larger social benefits. China’s infrastructure generates low returns, but then all infrastructure generates low returns. That’s because it’s a public good—something that’s provided at low cost for the well-being of society. The state-owned firm that builds a bridge or high-speed rail link or water treatment plant might not generate much income. The firms and households that use the new facilities do. Ultimately— China’s government hopes—that will result in enough tax revenue to make everyone whole.
Finally, the defaults by Dongbei Special and others that signaled weakness in China’s financial system were also a step forward on reform. It was moral hazard—the belief that all loans to state firms had a no-default guarantee—that kept the credit flowing to projects of dubious value. Losses for banks and bond investors chipped away at moral hazard, encouraging more rational and efficient allocation of credit. Defaults show cracks appearing in China’s financial system. Cracks, with apologies to Leonard Cohen, are how the light gets in.

Total revenue of China’s state-owned enterprises in 2014.

1. Yuzhe Zhang, “东北特钢失信样本,” Caixin, 22nd July 2016.
2. Alfred Liu, “These Are China’s Shadow Banking Hotspots,” Bloomberg, 6th September 2017.
3. China Statistical Yearbook (Beijing: National Bureau of Statistics, 2017).
4. China Statistical Yearbook, 2017.
5. Sally Chen and Joong Shik Kang., Credit Booms—Is China Different? (Washington, DC: International Monetary Fund, 2017).
6. Barry Naughton and Kellee Tsai, State Capitalism, Institutional Adaptation, and the Chinese Miracle (Cambridge: Cambridge University Press, 2015).
7. Fielding Chen, “Plenty of Room for Capital Spending in China,” Bloomberg, 16th July 2014.
8. China Statistical Yearbook, 2017.
9. People’s Daily, “辽宁省省长陈求发：我们顶着压力挤压水分,” 17th January 2017
10. Judy Chen and Dingmin Zhang, “Liaoning Companies’ Income Insufficient to Cover Debt Servicing,” Bloomberg, September 9, 2011.
11. Tom Orlik and Justin Jimenez, “Bad Debts? That’s a Flyover Province Problem,” Bloomberg, April 12, 2017.
12. Xiaoyi Shao, “China’s Fin Min Says Risk of Local Government Debt Under Control,” Reuters, March 6, 2016.
13. Chong-En Bai, Chang-Tai Hsieh, and Zheng Song, The Long Shadow of China’s Fiscal Expansion (Washington, DC: Brookings Institution, 2016).
14. Carmen Reinhart and Kenneth Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2011).
15. Zhang Yawu, “Spring for Real Estate Market Needs Common Care,” Luoyang Daily, March 27, 2009.
16. Shiyin Chen, “China on ‘Treadmill to Hell’ amid Bubble, Chanos Says,” Bloomberg, April 8, 2010.
17. Andy Xie, “China Real-Estate Bust Is Morphing into a Slow Leak,” Bloomberg, September 26, 2010.

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