Comment on “Fiscal Prudence and Growth Sustainability: An Analysis of China's Public Debts”

• Author: Osamu Tanaka
• DOI: http://doi.org/10.1111/j.1748-3131.2012.01237.x
• Date: 01 December 2012
• Published date: 01 December 2012

Comment on “Fiscal Prudence and Growth

Sustainability: An Analysis of China’s

Public Debts”

Osamu TANAKA†

Ministry of Finance

JEL codes: H61, H63, H74

This comment focuses on three areas: the pension issue, the problem of nonperforming

bank loans, and the local government debt.

1. The pension issue. Fan and Lv (2012) clearly state that social pension funds are cur-

rently showing a surplus so they are not subject to public debt. This treatment is

correct. However, China has set itself the goal of having a 100% pension insurance

coverage rate for both urban and rural areas by the end of 2012. If that happens, to

estimate the total amount of pensions to be paid to national citizens in the future

and to see whether or not the current amount of social pension fund reserves are

sufficient for that, it is better to start calculating pension finances as soon as possible.

If the current amount of reserves is insufficient, then the deficiency becomes a

potential public debt of the citizens in the future. Also, in China,there is the problem

that local governments arbitrarily divert insurance premiums that national citizens

have saved in their personal pension accounts, so the balance of their personal

accounts is in effect zero. This is clearly the public debt of local governments when

seen from the viewpoint of the people, and it is necessary to clarify the size of this

problem.

2. The problem of nonperforming bank loans. Since 1999, four large state-owned com-

mercial banks each established asset management companies. In 2000, these four

banks and a development bank transferred 1.4 trillion yuan of bad loans to those

asset management companies. Thereafter, a huge amount of these nonperforming

loans were transferred back to the four companies. The asset management compa-

nies were supposed to be liquidated after 10 years, but they still exist even today.

Depending on the actual financial position of these asset management companies

and what policy they adopt to finally dispose of the nonperforming loans they hold,

the non-performing loans that have been left there for many years could possibly

become public debt again. Furthermore, care must be taken with regard to how

much of the balance of real estate-related loans will in the future become new non-

performing loans.

†Correspondence: Osamu Tanaka, Policy Research Institute, Ministry of Finance, 3-1-1 Kasumi-

gaseki, Chiyoda-ku, Tokyo 100-8940, Japan. Email: osamu.tanaka@mof.go.jp

bs_bs_banner

doi: 10.1111/j.1748-3131.2012.01237.x Asian Economic Policy Review (2012) 7, 225–226

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research 225