/ world today news/ The Chinese state has never abandoned such a means of supporting the budget and the economy as loans. At the same time, the Chinese authorities have always sought to control government borrowing and public debt, establishing a number of “red lines” that cannot be crossed.
The main types of “red lines” were the maximum values of the state budget deficit and the total amount of public debt. Mostly not in absolute terms, but in relative terms – as a percentage of gross domestic product (GDP).
I don’t know why, but in establishing such “red lines”, the Chinese leadership is guided by the standards of the Maastricht Treaty of European countries (1992), the document that laid the foundations of the European Union.
The agreement stipulates that the state budget deficit of the EU member states should not exceed 3% of GDP, and the public (state) debt should not exceed 60% of GDP.
In the 1990s, for China, the European standard for the maximum value of government debt seemed something very distant and unattainable. So in 1995, according to the IMF, China’s government debt amounted to a modest 21.62% of GDP.
By 2000, it increased slightly and became equal to 22.99% of GDP. But during this century, the dynamics of national debt began to resemble exponential growth. By 2010, the figure had risen to 33.92% of GDP. And China’s government debt crossed the “red line” of the European standard in 2019, when the figure stood at 60.4% of GDP.
But the debt growth didn’t stop there. Here are the values of the indicator in the following years (%): 2020 – 70.14; 2021 – 71.84; 2022 – 77.10.
A kind of “quantum jump” occurred in 2019-2020, when the value of the indicator increased by nearly 10 percentage points in a year. To be fair, it must be said that at that time in many countries of the world the public debt increased significantly, both in absolute and relative terms.
The reason for this was the so-called “Covid pandemic”, which provoked an economic crisis in almost all countries of the world. And countries have at least somewhat tried to mitigate the recession by increasing government spending and public debt.
By the way, China in 2020 was almost the only country in the world where there was no decline in GDP, there was even a slight increase in GDP. This was achieved thanks to a rather sharp increase in government spending and public debt.
All experts expect that by the end of 2023, China’s public debt will cross the 80% of GDP mark. According to the estimated estimates of the famous information resource STATISTA, the relative level of China’s public debt will be (% of GDP): 2023 – 82.98; 2024 – 87.41; 2025 – 91.80; 2026 – 95.90; 2027 – 100.12; 2028 – 104.34.
In short, China’s government debt is expected to pass first 90 percent and then 100 percent of GDP in the near future. After that, the Celestial Empire will join the club of countries whose public debt is greater than their annual GDP.
The most prominent members of this club are currently: the US (121.38% of GDP in 2022); Japan (261.29%); Greece (177.43%); Italy (144.41%), Spain (111.98%); France (111.67%); Canada (106.59%); Great Britain (101.36%).
The national debt of any country grows due to the fact that government borrowing outpaces the repayment of previous debts. In addition, we are talking about loans not only from the central government, but also from lower levels of government, to local (municipal) authorities.
For many years, China’s central government maintained a government deficit ceiling of 3 percent of GDP. Solving many of its problems by increasing the debts of local government bodies.
And if we add up the debts of all levels of government in China, then the state’s annual net borrowing (that is, borrowings minus debt repayments) has long since begun to exceed 3% of GDP.
In 1990, China’s net government borrowing was just 0.7% of GDP, according to the IMF. In 2010, they were even smaller – 0.4% of GDP. In 2015 – 2.5%. But in 2016, they had already increased to 3.4% of GDP. They then continued to grow rapidly, reaching 6.1% of GDP in 2019.
In 2020, a record level of net loans was achieved – 9.7% of GDP. I have already noted above that such a jump is due to the “Covid pandemic” that began in the Celestial Empire, which threatened a serious economic crisis.
The crisis was stopped by powerful loans, most of which came from local Chinese authorities. Net government borrowing fell slightly in subsequent years, but all settled early to higher levels than pre-Covid levels. In 2022, they amount to 7.5% of GDP; in 2023 they are estimated at 7.1% of GDP.
The IMF gives the following forecasts for the amount of net government loans for the following years (% of GDP): 2024 – 7.0; 2025 – 7.3; 2026 – 7.5; 2027 – 7.6; 2028 – 7.8. It is obvious that at such estimates, China’s total public debt will grow rapidly.
At the same time, for the Chinese authorities, the “sacred cow” remains the limit value of the budget deficit of the PRC of 3% of GDP. Thus, in 2019, the deficit was equal to 2.8% of GDP. But when the so-called “COVID pandemic” began, Beijing had to cross the “red line”.
In 2020, the budget deficit jumped to 3.6% of GDP; in 2021 it amounts to 3.2% of GDP. But as early as 2022, the figure was back to normal levels; the deficit amounts to 2.8% of GDP. For 2023, the Chinese authorities prepared a state budget in which the deficit was planned to be exactly 3% of GDP. By autumn, everyone was confident that the 2023 budget would be met exactly, including the size of the deficit.
But in October, the State Council sent a number of proposals for emergency public finance measures to the Standing Committee of the National People’s Congress (NPC). And on the 24th of the said month, the proposals were approved.
Their essence boils down to the fact that the Chinese government issued an additional 1 trillion yuan ($141 billion) in government bonds in the fourth quarter of this year to finance infrastructure spending.
The funds collected will be transferred to local authorities through transfer payments, and the central government will take responsibility for paying the principal and interest. Half of the funds, 500 billion yuan, will be released this year and half will be carried over to 2024.
Vice Finance Minister Zhu Zhongming said at a briefing on October 25 that the money raised will mainly fund investments in eight major areas, including rebuilding disaster-hit areas, implementing key flood control projects and improving disaster management. The main beneficiaries will be the regions of North and Northeast China.
The central government rarely issues special treasury bonds designed to finance specific policies or projects (“targeted loans”). The first time was in 1998 during the Asian financial crisis, their net use was in 2007 during the global financial crisis and then again in 2020 during the “Covid pandemic”.
The present decision is the fourth case. However, this is the first time that special government bonds will be included in the budget deficit.
The rationale behind the October decision was that local authorities, which until recently bore the brunt of government borrowing, had exhausted all their options.
Many are in pre-default condition. And some have already defaulted on their debt obligations. It’s just that the state-party leadership of the Celestial Empire does not recommend the media to publicize this, so as not to cause panic in the public and among investors.
The additional bond loans approved by the NDK increase the budget deficit to 3.8% of GDP. The country again left the “red line”. It is also a record budget deficit in China’s history.
It is noteworthy that for some time there has been an unspoken censorship of publications on economic topics in China. Authors are not recommended to criticize the economic policy of the party and the state and to express too radical proposals that do not fit into the official ideology. And in November, curious statements by the Chinese economist Jia Genliang appeared in the Chinese media.
He recommended that the government actively hire public sector workers and significantly increase government spending to increase the income and consumption of the population. According to the Chinese economist, China should not fear a decline in goods exports and a reduction in trade surplus as a result of increased Western protectionism in the West.
These losses can be offset by an increase in budget expenditures and the budget deficit. The economist endorsed the just-taken decision to increase the budget deficit to 3.8% of GDP, noting that it would certainly have a beneficial effect on China’s economy.
But he said this measure was not enough. And that the budget deficit threshold should be raised to at least 5% of GDP. Observers opined that Jia Genliang’s public appearance was sanctioned by the Chinese authorities. And soon a decision can really be made to move the “red line” to a new level – 5% of GDP.
PS Compared to the Chinese indicators, the state budget deficit of the Russian Federation looks very modest. According to preliminary estimates, by the end of 2023 it will amount to no more than 1% of GDP.
Translation: SM
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