In recent months, bearish sentiment about the Chinese economy has surged, owing largely to three conjectures. First, China's housing market is on the brink of collapse. Second, China's fiscal position will worsen rapidly because of huge local government debt. And, third, the collapse of underground credit networks in bustling cities such as Wenzhou will lead to a financial crisis across the country.
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But despite its problems, China's economy remains in good condition - at least so far.
Since the 21st century began, skyrocketing housing prices in China, except for a short respite during the global financial crisis, have caused serious social discontent. The government has finally clamped down on housing speculation. As a result, prices fell in October for the first time this year, and property investment growth also fell.
But real demand will remain strong after speculative demand dissipates. As soon as housing prices fall to an affordable level, buyers will set a floor under the decline.
Over the past decade, property investment in China has been the single most important contributor to fixed-asset investment growth and, therefore, to the economy. Since the late 1990s, the property investment-to-GDP ratio has been far higher than it was in countries such as Japan and South Korea during their high-growth periods.
It is simply wrong for a developing country with per capita income of US$5,000 (Dh18,367) to concentrate its resources on producing concrete and cement. Although a significant decline in property investment will have a serious negative impact on China's growth. As long as the fall is not too drastic, it is a welcome development.
Meanwhile, local-government debts are a relatively new phenomenon. In 2009, local governments were encouraged to create special purpose vehicles, specifically "local finance platforms" (LFPs), to supplement China's 4 trillion yuan (Dh2.31tn) stimulus package. The LFPs would borrow from banks using future government revenue as collateral to finance packaged-investment projects in localities.
There is no denying that local-government debt is a danger for the Chinese economy. According to China's national audit office, these LFPs' total borrowing amounts to 10.7tn yuan, of which 79.1 per cent is bank loans. But it is equally true that China's local-government debt has so far been manageable, and there is no reason to believe that all of it is bad. In fact, for the majority of the LFPs, the cash flow generated by investment so far has been enough to meet repayment of principal and interest. According to the Industrial and Commercial Bank of China 93 per cent of its loans to LFPs are being repaid regularly.
The bank's non-performing loan (NPL) ratio for LFP loans is as low as 0.3 per cent, while the corresponding coverage ratio - the bank's ability to absorb losses from NPLs - is 1,066 per cent. According to the national audit office, the NPL ratio for the 10.7tn of local-government debt is about 2.3 per cent.
A significant proportion of total local-government debt either has no direct relation to local governments or cannot be guaranteed by them. Therefore, in legal terms, it is not government debt at all. In addition, given that local-government debt comprises 27 per cent of China's GDP last year, while central government debt and policy loans are 20 per cent and 6 per cent of GDP, respectively, the total public debt-to-GDP ratio is about 53 per cent - lower than Germany's. So, while China should not be complacent about local-government debt, panic is unwarranted.
Yu Yongding is a former member of the monetary policy committee of the Peoples' Bank of China and former director of the Chinese Academy of Sciences' Institute of World Economics and Politics
* Project Syndicate
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