Li Shanshan's interpretation of China's ** broad debt ratio, how do you view it?
This article was published in Caijing Journal No. 23.
The World Bank (1998) divides ** debt into two types from two aspects: explicit and implicit debts according to whether there are no statutory provisions or explicit contractual provisions, and direct debts and contingent debts according to whether they are necessary. A definitive debt is a debt of the State as determined by a State statutory or contractual basis;Implicit debt refers to the moral responsibility assumed by **, which reflects the pressure of society and various interest groups. Direct debt is a debt that can be sustained under all conditions, is not dependent on a certain event, and is affected by a specific factor;A contingent debt is a debt that arises as a result of an unexpected event.
Based on the World Bank's criteria for classifying "broad debt", this paper summarizes the meaning of China's "broad debt".
*'s public debt is mainly composed of national debt and local ** debt. China's contingent liabilities refer to the statutory guarantees provided by the state to certain specific entities such as guarantees, and their overall scale is relatively small. Hidden debts. Although local bonds have been withdrawn from the name, in order to prevent systemic risks, the state still assumes certain guarantee responsibilities for them, and the bonds have essentially become a kind of "**** debt." In addition to local public debts, China's hidden debts also include expenditures such as social pension insurance and medical insurance. Among them, the contingent liabilities of ** refer to the various rescue expenses provided by the state when the solvency of different types of commercial banks declines;The debts owed by the State enterprises and enterprises to the State shall be paid off by them as collateral or with the sums they need. Medium- and long-term expenses incurred in activities such as the establishment of investments, the implementation of PPPs and the purchase of services;and a covert guarantee of the liabilities of large non-state-owned enterprises.
Therefore, at present, there are only two kinds of national debt problems in China, in a broad sense, one is public debt in a broad sense, and the other is hidden debt represented by national debt. In addition to the explicit direct debt, among the other three types of debt, the number of explicit contingent liabilities is relatively small, while the public pension insurance and implicit contingent liabilities account for a relatively large proportion.
On this basis, combined with the concepts of "generalized liabilities" and "banking crisis" put forward by mainstream scholars at home and abroad, the concepts of "generalized liabilities" and "bank crisis" of China's generalized liabilities are constructed, and the transmission mechanism of China's financial risks is analyzed, so as to lay a foundation for the accurate assessment of China's first-class liabilities, the prevention and control of systemic risks, and the prevention and control of systemic risks.
01 General distribution of China's public debt.
1.The largest hidden state debt: local bonds and public pensions.
China's largest implicit debt is currently made up of local bonds and social pension insurance**. By the end of June 2022, there will be about 14 trillion local ** bonds in my country. Although China's local bonds have been stripped from fiscal debt, the main risk bearer of bonds is still the local **, and in this process, the state will also bear a certain financial burden.
Based on the above assumptions, the size of the pension insurance (cumulative) gap has been determined by existing studies, but according to the existing larger caliber estimates, the discount amount of China's pension insurance (cumulative) gap in the 15 years after 2035 is about 10 trillion to 15 trillion, which is equivalent to the stock of local ** bonds in China. These two numbers add up to about 24 trillion to 29 trillion, so the estimated potential ** debt should be between 25 trillion and 30 trillion.
2.China's major implicit debts and their financial risk transmission mechanism.
In the current economic situation, there are generally large debt guarantees to the banking system (Bordoandmeissner, 2016). As a result, the financial sector, especially the banking sector, has become the largest provider of financial speculation (Polava Bricks and Schick, 2002). Yi Gang (2020) estimates that under the assumption of a certain risk tolerance ratio, the proportion of risk assets in each industry to the entire financial assets is measured, of which, in 2018, the risk borne by financial institutions is 545%。In the case of a state-controlled company as the main financial organization, the financial risk should be more than 60%.
When high indebtedness prevails, large-scale debt restructuring is the best way to reduce debt stress (LaevenAndlaryea, 2009). Such a tax cut may be a restrictive measure, as it would have to inject money into the public to get support (Lavin, 2011). Considering China's increasingly severe fiscal situation, the pressure on the country's debt will be borne through the financial system, especially in the field of commercial banks, through various creditors and equity entities. This is embodied in the reduction of interest rates, debt restructuring, and the reduction of the real long-term discounted value of debt through sustained macroeconomic inflation and inflation. At the same time, due to the existence of lack of solvency, it has led to the re-"contingent debt" of **, which leads to the creation of financial risks.
After the restructuring of the debt structure and the absorption of various entities, the real present value of the state's interest-bearing liabilities and the potential contingent relief costs at this stage have been much smaller than the original interest-bearing debts, thus turning fiscal risks into financial risks (see Chart 1).
In China, through the analysis of the relationship between the indirect debts of financial institutions and financial institutions, it can be seen that China's fiscal policy has a greater impact on financial institutions.
* and local ** debt (express direct liability): In this case, the bank will invest funds in ** and local ** debt, as the main investment object of this type of asset, and it is also the largest component related to ** debt, which is relatively less risky. By the end of 2022, ** and local ** debt totaled 607 trillion, and it is expected that more than 50 trillion funds will be held by commercial banks.
Loans or non-standard assets related to local financing platforms (explicit direct debt): credit or non-standard assets related to financing platforms, by the end of 2022, these two types of assets totaled between 30 trillion and 40 trillion yuan, mainly financing platform loans.
Local ** bonds (including implicit direct debt): By the end of June 2022, the total scale of local ** bonds in the country will reach about 14 trillion;At present, the existence of wealth management products in China has reached 2534 trillion, of which it is expected that more than 40% of the local ** bonds, of which about 6 trillion are held by banks. This is also a major reason why it is difficult for China's local bond market to essentially solve the problem of rigid payment.
Overall, China's current interest-bearing liabilities are about 110 trillion yuan, and in the process, about 90 trillion yuan is held by commercial banks, and more than half of this part is concentrated in less risky government bonds, and the risks of local financing platform loans and local urban investment bonds deserve special attention (see chart).
3.An important source of potential contingent liabilities: the danger of a shortage of banks' solvency.
A medium-sized banking crisis in China could cost about five trillion yuan in financial fees. The implicit contingent liabilities of our country are the debts assumed by the state through its own implicit debts, especially to the banking system. LaevenandValencia (2020) points out that the cost of financial restructuring of the banking sector is 5% of GDP, which is an important indicator that the banking sector is facing a financial crisis. Given that the level of risk management of Chinese commercial banks has improved significantly, we believe that the probability of a serious bad debt ratio in the past few years has been very low.
If 4%-5% of GDP is calculated in 2022, a medium-sized treatment will incur about 5 trillion yuan in financial costs. In order to test this hypothesis, a sensitivity analysis was performed in this paper. Based on previous research results, we assume that the NPL ratio of banks (including policy banks) will increase by 2.. under the crisis assumption of small and medium-sized banks5-5%, and the corresponding fund replenishment scale is about 5 trillion (as shown in the chart). However, it is necessary to be vigilant that when the non-performing loan ratio increases by more than 4%, the demand for funds will increase at an accelerated rate. Therefore, limiting the credit risk of the financial system to a reasonable range is the key to effectively reducing the country's financial pressure.
4.China's public debt ratio is at a high level, but its asset quality is the basis for its debt servicing.
China's public debt ratio is small, while the overall debt ratio is high. China's official public debt ratio (debt GDP) reached 50 at the end of 20222%, which is significantly lower than that of major developed countries. According to the 2022 Article IV Consultation of the People's Republic of China, China's overall debt level was as high as 93% by the end of 2020, and this figure** will rise to 110% in 2022.
According to the estimates of this article, by the end of 2022, the total debt of China** will reach 120 trillion-135 trillion, and if some small projects such as the "health security deficit" that have not yet been counted are included, it is expected to reach 130 trillion-145 trillion, which is close to the IMF's estimate. This figure has already far exceeded the expectations of developing countries, even a small amount in developed countries.
Strong state property is the basis for guaranteeing the repayment of the country's debt. The evaluation of a country's ability to repay its debts should be examined in terms of both debt and assets. China** has about 200 trillion yuan in assets, which is derived from China's National Balance Sheet 2020 from the Ministry of Finance. * is still well above its liabilities, which will provide strong support for maintaining the market's trust in its bonds, keeping it liquid and its ability to repay its debts. The biggest risk is the mismatch of assets and liabilities, tight capital flow and other problems, which requires vigorously promoting the market-oriented reform of the structure, accelerating the transformation of the first function, and improving the debt restructuring plan to ensure that the capital flow and income are compatible.
02 Views on the current situation of China's national bonds.
"Debt threshold" means that when the debt level is higher than a certain level, it will affect the development of the economy, and in serious cases, it will also cause economic and financial collapse. Reinhartandrogoff (2010) showed that the correlation between national debt and GDP is not significant when the proportion of national debt GDP is less than 90%.When it reaches more than 90%, the median value decreases by 1%.
Since there is not enough empirical evidence to prove that there is a significant causal relationship between the level of debt and economic development in China, it is of more practical significance to focus on the composition of local debt and the input benefit of debt.
In the composition of newly issued local ** bonds, the proportion of "repaying the old with the new" has continued to rise, gradually rising from less than 50% in 2019 to about 90% in 2023. Unlike the huge debts of the United States, which need to be borne by international investors, China's "zombie" debts will "squeeze" private funds, thereby eroding the profit margins of commercial banks, thereby weakening the allocation of financial resources and support for the real economy, thus having a huge impact on China's economic development and the risks to the financial system.
Among the new bonds this year, the proportion of special bonds is even larger, from 415%, more than 80% by 2023, and the size of bonds is also above 60%. The Ministry of Finance has made it clear that the balance of financing income of special bonds should be listed as the top priority of the review, but recently, the national audit agency released the audit report on the implementation of the local budget and other fiscal revenues and expenditures in 2022, which shows that there are certain problems in the use of special bonds, such as the actual return of a large number of special bonds is lower than expected, which indicates that the corresponding project quality water injection is more serious, which may lead to repayment risks.
It is generally assumed that the domestic debt threshold is higher than the international debt threshold, but we should not underestimate the risks posed by internal debt. The danger of external debt is that when a country breaks out into a financial crisis that makes its local currency exchange rate**, the country has to service its debt by raising its domestic fiscal and export earnings, thus limiting its own development and increasing the probability of debt default (Bordoandmeissner, 2016), but the restructuring of internal debt is more difficult than external debt (Borenszteinet al.).,2006）。Reinhartandrogoff (2009) points out that the arrears of internal debt are as severe as the loss of external debt. If this were to happen, inflation would be much worse than it would have been if foreign debt had been defaulted.
03 Policy proposals for the management of systemic risk, especially in the banking sector.
China's public debt is mainly concentrated in the banking sector, and how to effectively prevent systemic risks caused by national debt and ensure the normal operation of the financial system is crucial. Therefore, this paper focuses on the prevention and resolution of China's local liabilities and the financial crisis of the financial system.
First, it is necessary to define the nature of bonds, and evaluate and manage their risks.
At present, there has been a lot of discussion on the reform of China's local bond regulatory system, but some of its problems have also attracted people's attention. At present, China has formed a form of implicit debt dominated by special debts, and the occurrence of its debt crisis will increase the debt burden of local governments. At present, China's special bonds are in the transitional stage of social welfare and marketization, but in the specific operation process, how can we quantify the "certain income"?Which is more important, utilities or markets?The lack of clarity in the definition gives decision-makers greater leeway. In this regard, it is necessary to improve it, make its nature clearer, and establish a relevant pre-risk and benefit evaluation and post-event accountability system. It is necessary to further improve the disclosure, supervision and accountability mechanism of China's special bonds.
Second, it is necessary to improve the early warning mechanism of China's local debt risk.
Since 2019, the Ministry of Finance has begun to evaluate local debts in various regions, and divided them into four levels: "red, orange, yellow and green", that is, debt ratios as evaluation indicators. However, at present, China's regional debt risk early warning system is not sound enough, and there is a big gap between the selection and measurement methods of some indicators and the world's common practice. For example, the selected indicators are still relatively simple and crude, and some indicators such as debt ratio and debt service ratio are used as the basis for evaluation, but they are not considered from multiple aspects, so there are still deficiencies in the evaluation of risks. Issues such as hidden liabilities are not included in the monitoring index, as it is difficult to estimate, in accordance with international practice.
Third, it is necessary to quickly supplement and improve China's savings insurance, so as to make good preparations for more financial investment in the financial system in the future.
At the end of this year, only 549400 million, compared to only 1 in the U.S. FDIC in the same period27% of the reserves. Judging from the practice of the United States in dealing with the banking crisis, adequate capital allocation is an important guarantee for dealing with financial risks. In response to this problem, China can refer to the practice of the United States, on the basis of levying savings premiums on banks in advance, and then invest in savings insurance in the form of issuing special bonds. China's over-reliance on direct financing from the financial system means that in the event of systemic risk, the banking sector is likely to rely more on state aid, large-scale financial investment, and debt restructuring.
Fourth, it weakens the homogeneity of small and medium-sized enterprises, increases the degree of dispersion of bondholders, and thus reduces the possibility of bankruptcy of small and medium-sized enterprise groups.
The composition of assets and income of small and medium-sized commercial banks in China shows the characteristics of "too many to fail" and "too big to fail", which is an important source of possible systemic financial risks in China. Geithner (2015) points out that Bear Stearns, who did not rank among the 15 largest banks in the United States during the global economic crisis, took a buy-in approach, precisely because even a small bank can do a lot of harm when the system is so weak. From the aspects of transformation and development mode, improving corporate governance structure, and implementing corporate competitive neutrality, it will be conducive to promoting the formation of a reasonable risk-return concept of small and medium-sized commercial banks in China, and promoting the diversification of their growth momentum and business model (Chen Zhongyang and Li Shanshan, 2022). In particular, with regard to treasury bonds, it is necessary to further introduce more long-term capital at home and abroad to reduce the excessive dependence of treasury bonds on the banking system.
Fifth, it is necessary to strengthen the supervision of first-class transactions and improve the predictability of first-class transactions.
In dealing with risky banks, China has made a lot of qualitative and general generalizations, but the lack of adequate information disclosure has created anxiety and fear among investors about the uncertainties ahead. In the first half of next year, the Federal Reserve Board took a hard look at SVB's operations, regulatory status, and revisited some of the original regulatory practices, and offered its views on how to improve supervision, including some confidential regulatory information, which was publicly disclosed. Although China's financial regulatory system is the most advanced in the world, objectively speaking, these transparent and pragmatic practices of the United States are still very valuable.