A leading Chinese economist has triggered heated online debate by calling for regulators to reverse their deleveraging drive and instead accommodate local government debt growth to shore up the health of the Chinese economy.
On January 27 Zhao Yanjing (赵燕菁), an economics professor from Xiamen University, published an article entitled “Debt is the Key to Rebooting the Economy” (债务是经济重启的关键), in which he argued that further accumulation of debt would serve as an effective means of restoring the health of the Chinese economy.
Zhao Yanjing’s article triggered heated discussion both online and in China’s academic community, prompting economist Zhao Jian (赵建) to respond with an article entitled “The Key to Restarting the Economy Is not Debt, but Credit” (重启经济的关键并非债务，而是信用) on 30 January.
This in turn prompted Zhao Yanjing to respond with an article entitled “Should We Save Local Government Debt and How Should We Save It” (地方债，要不要救？怎么救？), with Zhao Jian subsequently publishing a further response entitled “China Cannot Further Absorb the Opium of Debt, It Must Revitalise the Market Economy and Private Enterprise (中国不能再吸食债务鸦片，要重新激活市场经济和民营企业).
Zhao Yanjing’s core contention is that rebooting the economy is a complex process in which debt must play a critical role. The goal of policy should not be to eliminate debt, but to “maintain the value of debt and expand the scale of debt.” Because local debt is mainly used to build free public goods (parks, schools, roads, etc.), fee exemption for their usage does not mean that these assets have no income, which is reflected in the increase of local tax revenue.
Many taxes are shared with the central government or even shared with different localities, and public facilities (such as schools and subways) can increase the value of land, enabling local governments to use land sales to more readily pay of their debts. Based on this interpretation of local debt, Zhao Yanjing believes that it is not only appropriate but also necessary for the central government to bail out local governments.
Zhao Yanjing also argues that actively popping credit bubbles is not a sound means to achieve de-leveraging. “In a sense, popping the bubble is worse than letting the bubble burst by itself,” he writes.
He also views the debt issue from the perspective of intensifying rivalry and competition between China and the United States, arguing that “as far as the balance sheets of two competing countries are concerned, whoever can hold out to the end depends on whose credit can last longer.”
“This is why the United States also knows that its debt is unsustainable and the stock market cannot rise to the sky, but it tries every means to keep the bubble from bursting,” Zhao Yanjing wrote.
Zhao Jian argues that while debt is a highly effective means to promote economic recovery, China must exercise caution and refrain from engaging in “helicopter drops” of money.
“Debts that are not based on a foundation of solid credit will be worthless in the end,” Zhao Jian writes. “Relying on such debt to reboot the economy is nothing more than a deferral of crisis. The debts of some local governments entail abusing the credit of the higher-level government.
“If the local government wants to ask for money from the central government and the higher-level government, it must come up with a set of strict fiscal discipline measures and a streamlined administration plan in exchange.
“This is exchanging funds for reforms – if you don’t reform then you don’t receive money. Otherwise more funds will be wasted, and it will only be possible for debt to be serviced by means of more debt.”
Zhao Jian believes that there are two paths for resolving the highly urgent challenge of local government debt. The first one lies on the asset side and involves the stabilisation of regional real estate markets.
The second lies on the liabilities side, and involves stabilisation of outstanding debt, control of new debt, and firmly restricting the reckless and extravagant raising of hidden debt by local governments. Zhao also argues that any issues of special national bonds or province-level local bonds must be used to protect grassroots wages and see to local government operating expenses.
