Changyong Rhee, director of the International Monetary Fund’s Asia and Pacific Department, believes the odds of China suffering a full-blown financial crisis remain low:
1. China’s owes most of its debt to itself
- Says China is bound to see a rising number of credit defaults
- But unlike Thailand or South Korea before the Asian financial crisis erupted in 1997, China hasn’t borrowed heavily abroad in foreign currencies
- China’s total foreign debt amounts to only about 9% of its GDP, according to the country’s foreign-exchange regulator (compared to South Korea’s roughly one-third of GDP back in 1997)
- That means that if China’s currency falls further (it has dropped roughly 3% so far this year), it won’t necessarily cause a dramatic increase in borrowers’ debts in local-currency terms that then causes bankruptcies to snowball
2. China’s government debt is low.
- Beijing runs a budget deficit, but its relatively small – about 2.1% of GDP
- And total government debt, both those owed by the national government and China’s much more heavily indebted provinces, still add up to only about 53% of GDP, according to Bank of America Merrill Lynch.
- Compare that with the U.S., where government debt is roughly as big as GDP, or Japan, where government debt has ballooned to roughly 240% of GDP.
That means China can afford to spend more to offset the economic slowdown if it becomes too painful to borrowers. It can even afford to bail out banks or borrowers it deems too big to fail. In the worst case scenario, China’s central bank can follow the lead of the U.S. Federal Reserve and the Bank of Japan and create money by buying up assets – a policy known as quantitative easing.
3. China’s slowdown, like its economy, is centrally planned.
- Communist Party leaders … are able to exert their influence in a way that policy makers in the United States and other democratic nations can only envy
- China’s economic mandarins have much wider latitude to implement policy without the say-so of China’s National People’s Congress. China can instruct banks how to lend and to whom, and can even tell big companies how and where to invest.
There’s more at (ungated): IMF: Three Reasons Not to Worry About a Crisis in China
–
OK? Got it?
-
(Would it be churlish to suggest the article would be better off saying the odds of China suffering a full-blown financial crisis remain high, not low? Never mind).
