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

• Author: Jiro Naito
• Date: 01 December 2012
• Published date: 01 December 2012
• DOI: http://doi.org/10.1111/j.1748-3131.2012.01236.x

Comment on “Fiscal Prudence and Growth

Sustainability: An Analysis of China’s

Public Debts”

Jiro NAITO†

Daito Bunka University

JEL codes: H61, H63, H74

Fan and Lv (2012) makes quite few important points relating to the introduction of

China’s total financial system, China’s financial structure including central–local rela-

tions, recent fiscal policy, and sovereign risk. It is a highly accomplished paper with a

great deal of statistical data, so it is very valuable and helpful to all of us. My comments

focus on China’s financial risk, especially at the local level.

China made a public investment of 4 trillion yuan in 2008 under the influence of the

Lehman Crisis and, consequently, posted a fiscal deficit of 1 trillion yuan. However, the

deficit decreased to approximately 700 billion yuan in 2010 and to 500 billion yuan in

2011. This decline is attributed to substantial increases in fiscal revenues, such as value

added taxes and corporate taxes. The fiscal deficit has been maintained at a fairly low

level as it represented nearly 1.7% and 1.1% of China’s gross domestic product (GDP) in

2010 and 2011, respectively, and China has achieved the target of a deficit/GDP ratio of

2% or less. China’s financial well-being is extremely good, and China has the ability to

increase fiscal expenditure.

On the other hand, there are some concerns about the debt problems of local govern-

ments. The amount of outstanding debt of local governments at the end of 2010 was

about 10.7 trillion yuan. This debt is concentrated in prefectural governments as a

whole, and the proportion to total local debt is 43.5%, the highest among all local gov-

ernment levels. It should be noted that the amount of outstanding debt of local govern-

ment investment and financing platforms has reached to nearly 5 trillion yuan, and the

proportion to total local debt is about 46% in total, which is particularly high.

The local government investment and financing platforms are corporate organiza-

tions that have been established by local governments for financing, and it is said that

more than 8000 platforms existed as of 2009. These platforms are closely linked to real-

estate companies and development-related firms in particular. Since various investment

and financing platforms have been established and increased in the short-term without

any clear criteria on subsidies, they are strong contributors to the expansion of the out-

standing debt of local governments. Information about the platforms is too unclear to

enable outsiders to grasp their true state and to control them adequately, whichis v iewed

as a problem. The percentage of debt balance of platforms and governmental sectors and

†Correspondence: Jiro Naito, Daito Bunka University, 1-9-1 Takashimadaira, Itabashi-ku, Tokyo

175-8571, Japan. Email: jnaito@ic.daito.ac.jp

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doi: 10.1111/j.1748-3131.2012.01236.x Asian Economic Policy Review (2012) 7, 223–224

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research 223