Heres something to watch in 2014: Chinas debt. Although the odds of a full-blown financial crisis are slim, theyre not non-existent. The flash point is the burgeoning debt of Chinese localities to finance major infrastructure roads, bridges, water and sewer systems, subways, telecommunications networks as well as housing and commercial real estate developments. The fear is that revenues from these projects wont be adequate to repay the loans, resulting in defaults that undermine confidence and trigger bank runs. This would surely rattle the broader global economy.
Fanning the fears was an official report, released Dec. 30, showing that the debt of localities had jumped 67 percent since the end of 2010 to 17.9 trillion renminbi (about $3 trillion) in June 2013. In a separate report to clients, economist Tao Wang of UBS said the debt level was manageable but its rapid rise was alarming. Local debt now equals about 33 percent of Chinas economy (gross domestic product), up from about 10 percent in 2008 and almost nothing in 1997.
Still, the danger of a debt crisis, however remote, highlights Chinas largest economic problem. It is, as Lardy and others have emphasized, to shift the economy from excess investment spending toward more consumption. Too much investment threatens gluts of factories, housing and commercial offices. Chinas investment spending, Lardy notes, accounts for nearly half the economy, far more than in other major countries. A better-balanced economy would be safer for China and the rest of the world.