Dear users, this is a warm reminder from FT Chinese Network: If you are interested in more content from FT Chinese Network, please search “FT Chinese Network” in the Apple App Store or Google App Market and download the FT Chinese Network. Official app.
Data recently released by the Institute of International Finance (IIF) shows that global debt has exploded in recent years. In 2023, global debt hit a record high, reaching 313 trillion U.S. dollars, of which government debt has reached nearly 90 trillion U.S. dollars, the fastest growing rate in the past four years. quick. In response to the subprime mortgage crisis and the impact of the epidemic, major countries in the world, such as the United States, Japan and Europe, have significantly expanded their debts, but in different directions and means, resulting in different economic performances. China’s current macro leverage ratio is also close to 300%, especially local government debt pressure. What implications does the debt management of the above countries have for China? How should China respond?
1. Explosive growth of global debt
Over the past three decades, global debt has continued to rise. In March, the Organization for Economic Cooperation and Development (OECD) released the “2024 Global Debt Report” which showed that as of the end of 2023, the total government debt of OECD countries reached US$54 trillion, an increase of US$30 trillion since 2008. The Institute of International Finance (IIF) stated in the “Global Debt Monitor” report that global debt (including governments, residents, and companies) hit a record high in 2023, reaching 313 trillion U.S. dollars, an increase of more than 15 trillion U.S. dollars compared with 2022. Among them, government debt is US$89.9 trillion.
The U.S. government has recorded huge fiscal deficits in recent years and relied on large-scale borrowing to make up for it. The scale of U.S. government debt has skyrocketed from US$3.2 trillion in 1990 to US$34 trillion by the end of 2023, ranking first in the world for ten consecutive years. U.S. debt is growing faster than the overall economy. According to IIF statistics, the U.S. government debt-to-GDP ratio reached 120% in the fourth quarter of 2023, an increase of 3.1 percentage points compared to the same period in 2022. The monetization of fiscal deficits is also already taking place. After the epidemic, the synergy between fiscal expansion and monetary easing has been unprecedentedly strengthened. The Federal Reserve has increased base money significantly through quantitative easing, and the scale of its purchases of domestic treasury bonds has increased significantly. At the end of 2021, the share of U.S. treasury bonds held by the Federal Reserve even reached 24 %, which was only 13% in 2019.
The European debt crisis and the COVID-19 epidemic have promoted the rapid expansion of government debt in the euro area. At the end of 2007, the EU’s government debt was only 6.7 trillion euros, accounting for 65.9% of GDP. In 2009, the Greek sovereign debt crisis broke out, triggering the European debt crisis that swept many countries in the euro area, causing the euro area’s fiscal deficit and government debt to break the provisions of the Matricht Treaty (deficit ratio was less than 3%, government debt leverage ratio less than 60%). In 2014, the euro area government debt reached 9.5 trillion euros, accounting for 93.2% of GDP. In response to the impact of the COVID-19 epidemic and the energy crisis caused by the Russia-Ukraine conflict, European countries have adopted expansionary fiscal policies. As of the end of 2023, the euro area government debt reached 12.6 trillion, a record high. Among them, the ratio of government debt to GDP in six countries, namely Greece, Italy, Portugal, France, Spain, and Belgium, is all higher than 100%. In particular, the debt ratios of Greece and Italy are as high as 165.5% and 140.6%, which are far higher than the EU’s set 60% target. As the “locomotive” of the Eurozone, Germany has a relatively low debt ratio of 65.9%.
Japan’s long-term fiscal imbalance has kept the Japanese government’s debt ratio high. Since the 1990s, the Japanese economy has fallen into the “lost thirty years”, and Japanese government debt has continued to rise and is growing at an extremely fast rate. In terms of debt scale, according to IMF data, Japan’s total government debt was only 290 trillion yen in 1990. In 2022, Japan’s total debt has reached 1,449 trillion yen. Japan’s government debt has increased five times in thirty years. From the perspective of debt ratio, Japan’s government debt accounted for only 63% of GDP in 1990. However, after the outbreak of the Asian financial crisis in 1997, Japan’s government debt ratio exceeded 100%. In 2008, the U.S. subprime mortgage crisis and economic crisis followed one after another. In 2010, The Japanese government debt ratio exceeded 200%. After the outbreak of the COVID-19 epidemic, Japan’s government debt ratio soared to 259% in 2020, an increase of about 22 percentage points from 2019, the largest increase in a single year. At the same time, “debt monetization” has become the main means for the Japanese government to maintain huge government debt. On the one hand, the Bank of Japan has implemented a long-term negative or zero interest rate policy to reduce the pressure on interest payments; on the other hand, it has increased its efforts to purchase government bonds. By the end of 2023, the Bank of Japan held 45% of national debt.
Amid weak economic growth, fiscal deficits in emerging economies continue to expand. Growth in some emerging economies is sluggish, debt repayment and interest payments are under increasing pressure, and sovereign country ratings have been downgraded, which has intensified financing constraints and led to further expansion of fiscal deficits. IIF statistics show that as of 2023, the debt of 31 emerging market countries, including government, residents and enterprises, will reach US$104.6 trillion, reaching a new high of 255% of GDP, with Brazil, India, Argentina and other countries seeing the largest increases. Among them, Argentina was forced to seek assistance from the IMF in 2022 due to excessive debt repayment pressure. It successively reached a debt restructuring agreement of US$44.5 billion and an IMF loan of US$6 billion. In 2023, the proportion of government debt to GDP was 91.1%, which was higher than that in 2022. increased by 13 percentage points. In 2023, the government debt-to-GDP ratios of Brazil and India will be 86.2% and 82.7% respectively, an increase of 2.3 and 0.9 percentage points respectively compared with 2022.
2. What are the consequences of debt expansion?
Judging from the debt explosion and economic performance of various countries, debt explosion is not terrible. The key lies in the timeliness, pertinence, coordination and sustainability of fiscal expenditure. This depends on whether the debt investment can coordinate economic development, ease the contraction of the private sector, and effectively manage deflation. The author analyzes the mode and policy effects of fiscal expansion based on four scenarios.
Scenario 1: Fiscal expansion effectively promotes consumption recovery and improves corporate profits
After the epidemic, the United States adopted bailout policies to ensure that the balance sheets of residents and companies did not deteriorate, allowing the U.S. economy to continue to recover. The “helicopter money” consumption stimulus policy in the United States has caused residents’ income to rise instead of falling after the epidemic, effectively boosting residents’ consumer demand. During the epidemic, consumption was mainly supported through three measures: first, cash subsidies and unemployment benefits, with a total scale of nearly 1.7 trillion US dollars, accounting for approximately 8.0% of nominal GDP in 2020, and cash subsidies accounting for approximately 4.5% of nominal GDP in 2020. . The second is the Paycheck Protection Program, which provides forgivable loans to companies that are better able to maintain employee wages. Third, the Federal Reserve has also strengthened the cooperation with the Treasury Department and introduced structural monetary policies to boost consumption through targeted purchases of consumer ABS and support for the Paycheck Protection Plan. From 2021 to 2023, the real GDP of the United States will be 5.8%, 1.9% and 2.5% respectively, of which private consumption contributed 5.6, 1.7 and 1.5 percentage points respectively.
Policy investment in technological innovation has also promoted the vigorous development of some emerging industries. For example, the United States has increased R&D expenditures in emerging industries. In terms of semiconductor development, the United States announced the establishment of the International Technology Security and Innovation Fund of the “CHIPS Plan”, investing US$100 million annually from 2023 to 2028. In terms of new energy, the U.S. Department of Energy has announced a total investment of 3.5 billion to support the research and development of biofuels, clean hydrogen energy, and carbon capture, utilization and storage technology. The corporate profit expectations of high-tech companies continue to improve. Nasdaq will exceed 15,000 at the end of 2023, an increase of 70% compared with the end of 2019.
Scenario 2: Fiscal stimulus fails to eliminate deflation, leading to a vicious cycle of low growth and high debt
After experiencing the bubble crisis in the 1990s, Japan’s fiscal policy “focused on investment but ignored consumption”, which led to economic recovery encountering a “sluggish supply and demand cycle.” Expansionary fiscal policy focuses solely on increasing public investment. In this column, “Japan’s “Lost Thirty Years”, what did the author do wrong in terms of policy response? ” mentioned that since 1992, the Japanese government has continuously increased its public utility budget, adding 8.6 trillion yen in 1992, 11.6 trillion yen in 1993, 7.2 trillion yen in 1994, and in 1995 Emergency and comprehensive economic countermeasures totaling 18.8 trillion yen were launched, but they still focused on increasing public utility expenses and expanding public utility investment.
The decline in residents’ employment and consumption has not been given sufficient attention. Only in 1994 was a one-time “special tax cut” implemented for personal income tax, but it did not promote the growth of residents’ employment and consumption. In 1990, Japan’s effective employment ratio was 1.4 times, that is, there were 1.4 job openings for each job seeker in the labor market. It fell sharply thereafter and did not exceed 1 times until 2005. Affected by this, Japan’s private consumption growth rate dropped rapidly from 4.8% in 1990 to less than 3% in the following ten years. Coupled with the combined impact of the tightening consumption tax policy and the Southeast Asian financial crisis, the Japanese economy, which had slightly improved in 1996, once again into recession.
Scenario 3: Lack of coordination between fiscal and monetary policies makes it difficult to alleviate the deadlock of “stagflation”
The unified currency of the Eurozone and the independent fiscal systems of each country make it difficult to eradicate the differences between countries’ fiscal policies. Specifically, it involves the inability of each country’s fiscal deficit to assist monetary policy and the inability to control fiscal excesses. This contradiction was fully reflected in the most serious moment of the European debt crisis in 2011-2012. In recent years, the fierce competition among Eurozone countries over issues such as the burden of refugees and the fiscal austerity of some member states is also rooted in this.
Under the impact of the epidemic and the conflict between Russia and Ukraine, the risk of exposure of the above problems is significantly increasing. Affected by geopolitical tensions, high energy prices, and weak global demand, each member country of the Eurozone has implemented its own fiscal policies, making it difficult to pull the economy out of the downturn. In February 2024, the Eurozone industrial production index was -6.4% year-on-year. Retail sales have been negative for 11 consecutive months. The manufacturing PMI has been below the boom-bust line for 21 consecutive months. The fiscal vulnerability of some southern European economies continues to rise. The overall financial system of the Eurozone is not stable. Stable concerns intensify.
Scenario 4: Debt crisis, currency loss of control, triggering hyperinflation
In the 1970s, Latin American countries borrowed large amounts of foreign debt to develop their economies. However, as interest rates rose and capital flows reversed, the expanding debt scale triggered the Latin American debt crisis. Mexico announced in 1982 that it would have difficulty repaying its foreign debt. Subsequently, countries such as Brazil, Venezuela, Argentina, Peru and Chile successively encountered debt repayment difficulties and announced the termination or postponement of foreign debt repayments. Among them, Mexico has not reduced its fiscal deficit. From 1986 to 1988, the fiscal deficit of the Mexican central government accounted for more than 9% of GDP, which seriously affected economic development.
Currently, the Federal Reserve maintains high interest rates and the dollar appreciates sharply, putting some Latin American countries at risk of default on their national debt. This is somewhat similar to the Latin American debt crisis that broke out in the 1980s. Argentina’s inflation has been off the charts for a long time. Argentina’s cumulative inflation rate in 2023 reached 211.4%, the worst performance since 1991. This also comes from the government’s reliance on money printing to raise fiscal expenditures. Argentine President Milai artificially devalued the peso by 54% as soon as he came to power, further aggravating the inflation problem and triggering a sharp decline in Argentina’s domestic consumption. In the first quarter of 2024, Argentina’s beef consumption has fallen to its lowest level in 30 years.
3. How should China respond?
The different debt expansion models and economic development performances of the aforementioned countries show that government debt management needs to look beyond debt and consider the overall pattern and cycle of economic development. The author believes that these international experiences and lessons have the following three implications for the current government debt risks that China needs to deal with.
First, it is crucial to control government debt risks and maintain economic growth.
According to data disclosed by the National Finance and Development Laboratory, China’s macro leverage ratio rose to 294.8% (residents + non-financial enterprises + government) in the first quarter of 2024, of which the government sector leverage ratio rose to 56.7% (the central government leverage ratio was 23.9%, The local government leverage ratio is 32.8%), which is lower than the international warning line of 60%. However, China’s government debt risks are mainly reflected in the implicit debt of local governments. Considering that the market estimate of the scale of implicit local government debt is roughly around 60 trillion, plus explicit debt of about 40 trillion, China’s local government debt can reach a maximum of about 100 trillion, and the local government’s leverage ratio is about 80 %, the debt scale is not low. Especially since the second half of 2021, the real estate market has continued to decline, and local government land transfer revenue has shrunk significantly. The debt risks in some places are indeed worthy of attention.
However, debt risk management needs to be integrated with economic development, especially to prevent economic growth from declining. In the first quarter, the actual year-on-year GDP growth rate of 5.3% exceeded market expectations, but the main economic indicators in March generally declined year-on-year and month-on-month compared with January and February; in the first quarter, the national general public budget revenue fell by 2.3% year-on-year, of which tax revenue fell by 4.9% year-on-year. % (value-added tax fell by 7.1% year-on-year, and personal income tax fell by 4.5% year-on-year). These show that the current pressure on China’s economy to maintain steady growth is still great. The experiences and lessons of the aforementioned countries show that controlling government debt cannot be at the expense of economic growth, otherwise the gains outweigh the losses.
The author believes that at present, we should coordinately promote the standardized management of government debt and promote economic growth. On the one hand, it will increase central government expenditures to comprehensively alleviate the downward pressure on the economy, and replace the expenditures that should have been borne by the central government in the early stage through transfer payments, etc., to ease the debt repayment pressure of local governments; on the other hand, it will systematically plan to promote a new round of fiscal and taxation system reform. , better balance the division of administrative and financial powers between the central government and local governments, standardize local government debt channels and use of funds, and improve local government debt management mechanisms.
The second is to control the scale of debt, and more importantly, policies must work together to increase nominal economic growth.
Affected by the post-holiday drop in food and travel service prices and sluggish prices of durable consumer goods, the CPI fell to 0.1% year-on-year in March. Along with the decline in prices of industrial products (steel, cement, coal, etc.), the PPI fell to -2.8% year-on-year. Correspondingly, real GDP growth in the first quarter of 2024 was 5.3%, but nominal GDP growth was only 4.2%. The GDP deflator in the first quarter was -1.1%, which was negative for four consecutive quarters. Debt repayment is a nominal value, not a real value. Prices continue to be depressed, and nominal GDP growth continues to be lower than real GDP growth, further increasing the debt pressure on government departments.
To ease debt pressure, macroeconomic policies need to reverse the inversion between nominal economic growth and real growth as soon as possible. Drawing on the lessons learned from the Japanese economy’s thirty-year loss, on the one hand, although since 2024, the central bank has successively lowered the re-lending and rediscount rates to support agriculture and small businesses, lowered the deposit reserve ratio, and continuously increased and renewed the medium-term lending facility (MLF), 5 The 1-year LPR has also been significantly reduced, but the CPI growth rate is still far from the 3% target set in the government work report, and there is still room for further relaxation of monetary policy; on the other hand, in the context of high local government debt pressure, actively The fiscal policy requires the central government to increase expenditures, drive demand and CPI to rebound, and raise the nominal GDP growth rate above the real GDP growth rate.
Third, the focus of fiscal expenditure should be to boost household consumption.
Judging from the experience and lessons of the aforementioned countries, facing the problem of insufficient demand, on the one hand, it is necessary to coordinate active fiscal policies and loose monetary policies; on the other hand, it is necessary to coordinate fiscal expenditures to stimulate investment and stimulate consumption. As the author’s calculations in this column “Four Key Points of the 2024 Government Work Report” show, my country’s actual deficit rate in 2024 is about 8.2%, and the intensity of fiscal expenditure in a broad sense is not low. However, during the implementation process, it is necessary to consider the impact of the real estate downturn reducing land transfer revenue and debt repayment restricting local government spending capabilities.
On this basis, it is necessary to further optimize the fiscal expenditure structure. On the basis of ensuring the implementation of major national strategies and the creation of new quality productivity, fiscal support should also be increased to boost consumption, especially to increase the central fiscal support for consumer goods. The intensity of the trade-in subsidy will focus on solving the problem of weak recovery in physical consumption (the year-on-year growth rate of merchandise retail sales in March was only 2.7%), thereby driving a virtuous cycle of supply and demand.
Note: This article only represents the author’s personal views
Editor of this article Xu Jin [email protected]
