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Today， as China faces risk through upgrading the structure of its economy， the general consensus is that these risks are in the main manageable. More specifically， China’s current debt level is under control and withdrawal of the quantitative easing monetary policy， or QE， by developed nations， is not likely to trigger a financial crisis in the country. Looking further， challenges of overcapacity are being resolved and the possibility of economic turbulence brought about by the real estate market bubble is slight.
China’s debt level
China’s debts include government debt， corporate debt and household debt. The overall debt level is 220 percent of the nation’s gross domestic product （GDP）. Statistics by China’s National Audit Office show government debt at all levels had reached 30 trillion yuan （$4.8 trillion） by the end of June 2013. This figure was 60 percent of GDP， lower than the world average of 80 percent of a nation’s GDP. In developed countries， government debt is usually 100 to 110 percent of GDP.
In the same time-frame， China’s household debt amounted to 16 trillion yuan （$2.6 trillion）， 31 percent of GDP， much lower than the world average. Household debt in developed countries can reach 80 to 100 percent of GDP. Chinese enterprises suffer heavier debt burdens， about 120 to 130 percent of GDP， while the average is less than 100 percent of GDP in developed nations. However， China’s overall debt level is lower than the United States and the Euro zone， both exceeding 300 percent of their respective GDP. Japan’s overall debt level totaled 500 percent of the GDP. Comparatively speaking， China has a high savings rate to boost economic growth. In addition， a low budget deficit， a trade surplus， abundant foreign exchange reserves and relatively low inflation， all play to China’s advantage for future development.
Even if there are potential risks in regard to debts， China is capable of coping. By absorbing private investments and raising funds through the stock market to increase enterprises’ capital， high corporate debt levels will be alleviated. Creditors can also swap their debt for equity， or debtors can securitize their credit assets， so that the risk of the enterprises’ debt can be lowered.
The National Audit Office estimates that China’s local government debt amounted to 20 trillion yuan （$3.2 trillion） by the end of June 2013. Although this seems a large sum， the funds are mostly invested in constructing urban facilities and infrastructure， which will benefit the local economy in the long run. In addition， large sums are usually borrowed for specific projects， which are generally profitable. Local governments can also liquidate part of their assets to pay off the debts. For debts without specific projects， local governments have the capacity to repay them through taxation and tolling. They can also issue long-term bonds to pay back short-term bonds that expire. Finally， by introducing the mechanism of public-private partnerships and establishing financing and developing banks， local governments can enhance their paying abilities for infrastructure debts. Therefore， the possibility of an overall debt crisis is slight.
Withdrawal of QE
There are worries that the withdrawal of the U.S. QE monetary policy may cause economic turbulence to China. Unlike other emerging economies whose current accounts are in deficit， while capital accounts are in surplus， China has a low inflation as well as low level of foreign debts. For the emerging economies， both the current accounts and the capital accounts would be in deficit if the QE was cut， resulting in a sharp decrease in the nations’ foreign exchange reserve and spurring a currency crisis in turn.
However， the withdrawal of QE will not trouble China， but means an opportunity to enhance the country’s microeconomic regulation. In the past few years， as both China’s current and capital accounts were in surplus， excessive exchange rate appreciation posed a threat to China’s economy. Against the backdrop of excess liquidity in the domestic market， it is necessary for the central bank to hedge the risks， which will also inevitably bring unwanted side effects. If China positively addresses cutting the QE， the current account surplus will be balanced by the capital account deficit， realizing a balance of international payments. Besides， as international hot money leaves China， it is possible for the central bank to ride the wave and cut the reserve requirement ratio to reduce the opportunity for regulatory arbitrage. It will also eliminate the threat brought by excessive yuan appreciation and stimulate exports at the same time.
industries with overcapacity have been on the decline and loans to emerging industries are on the rise. As the developed economies are beginning to pick up， the productivity of some industries that were previously plagued by overcapacity will recover， such as the shipbuilding industry. Strong demand for investment in emerging green energy industries， such as new-energy vehicle manufacturing， will see the excess production finding a way to be consumed. Besides， China’s production capacity at the high end of the value chain is still seriously insufficient and the density of its railway and highway networks is lower than that in developed nations， leaving much room for more investment. China’s urbanization is facing a series of challenges， including poor drainage facilities， inconvenient transportation from residential areas to business districts and insufficient utilization of underground space. In future urbanization， China is planning to build better social facilities to improve care for senior citizens. All of these factors provide opportunities for industries with overcapacity.
Real estate
High housing prices in cities like Beijing and Shanghai are actually not creating a housing bubble. The limited land available in big cities cannot satisfy the demand for rapid urbanization. The weak housing price in the third- and fourth-tier cities doesn’t mean the real estate bubble is bursting and cold data alone cannot provide conclusions for the state of China’s real estate market. For instance， when every household possesses more than one property on average， China’s real estate market will be saturated. This argument actually does not measure up to the facts. As China has a large floating population， it is normal for people to have more than two properties- one in their hometown and one in the city where they work. If they rent an apartment in city， it means that some urban households need to have more than one property. Financial risk in the property market is also not a worry， as the down payment sum of the mortgage is usually large and the mortgage loans are usually of high-quality capital for banks.
China’s debt level
China’s debts include government debt， corporate debt and household debt. The overall debt level is 220 percent of the nation’s gross domestic product （GDP）. Statistics by China’s National Audit Office show government debt at all levels had reached 30 trillion yuan （$4.8 trillion） by the end of June 2013. This figure was 60 percent of GDP， lower than the world average of 80 percent of a nation’s GDP. In developed countries， government debt is usually 100 to 110 percent of GDP.
In the same time-frame， China’s household debt amounted to 16 trillion yuan （$2.6 trillion）， 31 percent of GDP， much lower than the world average. Household debt in developed countries can reach 80 to 100 percent of GDP. Chinese enterprises suffer heavier debt burdens， about 120 to 130 percent of GDP， while the average is less than 100 percent of GDP in developed nations. However， China’s overall debt level is lower than the United States and the Euro zone， both exceeding 300 percent of their respective GDP. Japan’s overall debt level totaled 500 percent of the GDP. Comparatively speaking， China has a high savings rate to boost economic growth. In addition， a low budget deficit， a trade surplus， abundant foreign exchange reserves and relatively low inflation， all play to China’s advantage for future development.
Even if there are potential risks in regard to debts， China is capable of coping. By absorbing private investments and raising funds through the stock market to increase enterprises’ capital， high corporate debt levels will be alleviated. Creditors can also swap their debt for equity， or debtors can securitize their credit assets， so that the risk of the enterprises’ debt can be lowered.
The National Audit Office estimates that China’s local government debt amounted to 20 trillion yuan （$3.2 trillion） by the end of June 2013. Although this seems a large sum， the funds are mostly invested in constructing urban facilities and infrastructure， which will benefit the local economy in the long run. In addition， large sums are usually borrowed for specific projects， which are generally profitable. Local governments can also liquidate part of their assets to pay off the debts. For debts without specific projects， local governments have the capacity to repay them through taxation and tolling. They can also issue long-term bonds to pay back short-term bonds that expire. Finally， by introducing the mechanism of public-private partnerships and establishing financing and developing banks， local governments can enhance their paying abilities for infrastructure debts. Therefore， the possibility of an overall debt crisis is slight.
Withdrawal of QE
There are worries that the withdrawal of the U.S. QE monetary policy may cause economic turbulence to China. Unlike other emerging economies whose current accounts are in deficit， while capital accounts are in surplus， China has a low inflation as well as low level of foreign debts. For the emerging economies， both the current accounts and the capital accounts would be in deficit if the QE was cut， resulting in a sharp decrease in the nations’ foreign exchange reserve and spurring a currency crisis in turn.
However， the withdrawal of QE will not trouble China， but means an opportunity to enhance the country’s microeconomic regulation. In the past few years， as both China’s current and capital accounts were in surplus， excessive exchange rate appreciation posed a threat to China’s economy. Against the backdrop of excess liquidity in the domestic market， it is necessary for the central bank to hedge the risks， which will also inevitably bring unwanted side effects. If China positively addresses cutting the QE， the current account surplus will be balanced by the capital account deficit， realizing a balance of international payments. Besides， as international hot money leaves China， it is possible for the central bank to ride the wave and cut the reserve requirement ratio to reduce the opportunity for regulatory arbitrage. It will also eliminate the threat brought by excessive yuan appreciation and stimulate exports at the same time.
industries with overcapacity have been on the decline and loans to emerging industries are on the rise. As the developed economies are beginning to pick up， the productivity of some industries that were previously plagued by overcapacity will recover， such as the shipbuilding industry. Strong demand for investment in emerging green energy industries， such as new-energy vehicle manufacturing， will see the excess production finding a way to be consumed. Besides， China’s production capacity at the high end of the value chain is still seriously insufficient and the density of its railway and highway networks is lower than that in developed nations， leaving much room for more investment. China’s urbanization is facing a series of challenges， including poor drainage facilities， inconvenient transportation from residential areas to business districts and insufficient utilization of underground space. In future urbanization， China is planning to build better social facilities to improve care for senior citizens. All of these factors provide opportunities for industries with overcapacity.
Real estate
High housing prices in cities like Beijing and Shanghai are actually not creating a housing bubble. The limited land available in big cities cannot satisfy the demand for rapid urbanization. The weak housing price in the third- and fourth-tier cities doesn’t mean the real estate bubble is bursting and cold data alone cannot provide conclusions for the state of China’s real estate market. For instance， when every household possesses more than one property on average， China’s real estate market will be saturated. This argument actually does not measure up to the facts. As China has a large floating population， it is normal for people to have more than two properties- one in their hometown and one in the city where they work. If they rent an apartment in city， it means that some urban households need to have more than one property. Financial risk in the property market is also not a worry， as the down payment sum of the mortgage is usually large and the mortgage loans are usually of high-quality capital for banks.