Chinese Debt Management

CHINA FINANCIAL - Report 15 Sep 2016 by Michael Pettis

Special points to highlight in this issue:
* There is a temptation for policy advisors to propose specific solution to problems only after they have been abstracted from their systemic contexts. In an economy with deep imbalances and strong institutional constraints, however, this can easily backfire. It is too easy for policies that resolve individual problems to fail to resolve problems for the economy overall.
* Ultimately much of China’s debt is a direct or contingent obligation of the government, with the problem of excessive debt a problem for the whole economy, and not just for specific sectors within the economy. If debt reduction within any part of the financial system is to be meaningful, there must be an actual reduction in the government’s direct and contingent debt obligations, and not simply an explicit or hidden transfer of those obligations.
* Reducing a borrower’s debt burden means assigning part of the debt-servicing cost to some sector of the economy that can absorb the cost. Paying down Chinese debt, in other words, must involve a loss of resources for local governments, businesses, households, or some other sector. Any debt resolution strategy that does not also specify which sector will ultimately absorb the cost has resolved nothing substantial.

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