Original Shen Jianguang FT Chinese 2024-04-24
In response to the subprime mortgage crisis and the impact of the epidemic, major countries in the United States, Japan, Europe and other countries have significantly expanded their debts, but in different directions and means, resulting in different economic performance. What does this mean for China?
Text丨FT Chinese Network columnist Shen Jianguang
According to data recently released by the Institute of International Finance (IIF), the global debt explosion in recent years will hit a record high in 2023, reaching 313 trillion US dollars, of which government debt has approached 90 trillion US dollars, the fastest growth rate in the past four years. In response to the subprime mortgage crisis and the impact of the epidemic, major countries in the United States, Japan, Europe and other countries have significantly expanded their debts, but in different directions and means, resulting in different economic performance. At present, China's macro leverage ratio is also close to 300%, especially the local debt pressure is high, what are the implications for China's debt management in these countries, and how should China respond?
First, the explosive growth of global debt
For nearly three decades, the scale of global debt has continued to rise. The Organisation for Economic Co-operation and Development (OECD) released its Global Debt Report 2024 in March, which showed that the total government debt of OECD countries reached $54 trillion by the end of 2023, an increase of $30 trillion since 2008. The Institute of International Finance (IIF) said in the Global Debt Monitor report that global debt (including governments, households, and businesses) will hit a record high of $313 trillion in 2023, an increase of more than $15 trillion from 2022, of which government debt is $89.9 trillion.
U.S. government secretaries have recorded large fiscal deficits in recent years, which they have relied on to finance by borrowing on a large scale. The scale of U.S. government debt has soared from $3.2 trillion in 1990 to $34 trillion by the end of 2023, ranking first in the world for ten consecutive years. U.S. debt is growing much faster than the economy as a whole. According to IIF, the U.S. government debt has reached 120% of GDP in the fourth quarter of 2023, an increase of 3.1 percentage points compared with the same period in 2022. The monetization of the fiscal deficit is already taking place, and the synergy between fiscal expansion and monetary easing has intensified unprecedentedly after the pandemic, and the Fed has massively increased its base money through quantitative easing, and the scale of its purchases of domestic Treasury bonds has increased significantly, reaching 24% of US Treasuries at the end of 2021, compared to only 13% in 2019.
The European debt crisis and the new crown epidemic have driven the rapid expansion of government debt in the eurozone. At the end of 2007, the EU's government debt was only 6.7 trillion euros, or 65.9% of GDP. In 2009, Greece's sovereign debt crisis erupted, triggering a European debt crisis that swept many countries in the eurozone, resulting in the eurozone's fiscal deficit and government debt breaking the provisions of the Matricht Treaty (deficit ratio of less than 3% and government debt leverage ratio of less than 60%). In 2014, the eurozone's government debt reached 9.5 trillion euros, or 93.2% of GDP. In response to the impact of the new crown pneumonia epidemic and the energy crisis caused by the Russia-Ukraine conflict, European countries have adopted expansionary fiscal policies, and by the end of 2023, the scale of government debt in the euro reached a record high of 12.6 trillion. Among them, Greece, Italy, Portugal, France, Spain, and Belgium all have government debt-to-GDP ratios of more than 100%, especially Greece and Italy, which have debt ratios of 165.5% and 140.6%, far higher than the 60% target set by the European Union. Germany, the "locomotive" of the eurozone, 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 90s of the 20th century, Japan's economy has fallen into a "lost thirty years", and Japanese government debt has continued to rise, and the growth rate is extremely fast. In terms of the scale of debt, according to IMF data, Japan's total government debt was only 290 trillion yen in 1990, and in 2022, Japan's has reached 1,449 trillion yen, and Japan's government debt has increased fivefold in three decades. From the perspective of debt ratio, in 1990, Japan's government debt accounted for only 63% of GDP, but after the outbreak of the Asian financial crisis in 1997, Japan's government debt ratio exceeded 100%, and in 2008, the U.S. subprime mortgage crisis and economic crisis followed, and in 2010, Japan's government debt ratio exceeded 200%. After the outbreak of the new crown epidemic, Japan's government debt ratio soared to 259% in 2020, an increase of about 22 percentage points from 2019 and the largest increase in a single year. At the same time, "debt monetization" has become the main means by which the Japanese government maintains its huge government debt. On the one hand, the Bank of Japan has implemented a long-term policy of negative or zero interest rates to reduce the pressure on interest payments, and on the other hand, it has stepped up its efforts to purchase government bonds, and the Bank of Japan will hold 45% of national debt by the end of 2023.
Fiscal deficits in emerging economies continue to widen amid sluggish economic growth. Sluggish growth in some emerging economies, increasing pressure on debt servicing, and downgrades of sovereign ratings have exacerbated financing constraints, leading to further widening of fiscal deficits. According to IIF statistics, as of 2023, 31 emerging market countries, including government, household and corporate debt, will reach a new high of 255% of GDP, with Brazil, India, Argentina and other countries increasing the most. Among them, Argentina was forced to seek assistance from the IMF in 2022 due to excessive debt repayment pressure, and reached a debt restructuring agreement of US$44.5 billion and an IMF loan of US$6 billion, and the government debt-to-GDP ratio in 2023 will be 91.1%, an increase of 13 percentage points from 2022. In 2023, the ratio of government debt to GDP in Brazil and India will be 86.2% and 82.7%, respectively, an increase of 2.3 and 0.9 percentage points compared to 2022.
2. What are the consequences of debt expansion?
Judging from the debt explosion and economic performance of various countries, the debt explosion is not terrible, and the key lies in the timeliness, targeting, coordination and sustainability of fiscal expenditure. It depends on whether debt is directed to align economic development, mitigate private sector contraction, and effectively manage deflation. Based on four scenarios, the author analyzes the pattern and policy effects of fiscal expansion.
Scenario 1: Fiscal expansion effectively promotes the recovery of consumption and the improvement of corporate earnings
After the epidemic, the U.S. economy continued to recover through bailout policies to ensure that the balance sheets of households and businesses did not deteriorate. The U.S. "helicopter money-throwing" consumption stimulus policy has caused residents' incomes to rise instead of falling after the epidemic, effectively boosting residents' consumption demand. During the epidemic, consumption was mainly supported through three measures: cash grants and unemployment benefits, which combined with nearly $1.7 trillion, accounting for about 8.0% of nominal GDP in 2020, and cash grants accounted for about 4.5% of nominal GDP in 2020. The second is the Salary Protection Program, which provides forgiveness of loans to companies that can better maintain employees' salaries. Third, the Federal Reserve has also strengthened the cooperation of the Ministry of Finance and introduced a structural monetary policy to boost consumption through targeted purchases of consumer ABS and support for wage protection programs. 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 will contribute 5.6, 1.7 and 1.5 percentage points, respectively.
Policy investment in scientific and technological innovation has also promoted the vigorous development of some emerging industries. For example, the United States has increased R&D spending on emerging industries, and in the development of semiconductors, the United States announced the establishment of an international technology security and innovation fund for the "CHIPS Program", with an annual investment of $100 million from 2023 to 2028. In terms of new energy, the U.S. Department of Energy has announced a total investment of 3.5 billion yuan to support the research and development of biofuels, clean hydrogen, and carbon capture, utilization and storage technologies. Corporate earnings expectations for high-tech companies are improving, with the Nasdaq topping 15,000 at the end of 2023, up 70% from the end of 2019.
Scenario 2: Fiscal stimulus is not out of deflation, leading to a vicious circle of low growth and high debt
After the bubble crisis of the 90s, Japan's fiscal policy "heavy investment and light consumption" led to a "poor cycle of supply and demand" in economic recovery. Expansionary fiscal policy focuses only on increasing public investment. In this column, "What Did Japan Do Wrong in Policy Response to Japan's 'Lost Thirty Years'?" I note that since 1992, the Japanese government has been increasing its public utility budget by 8.6 trillion yen in 1992, 11.6 trillion yen in 1993, 7.2 trillion yen in 1994, and in 1995 it launched emergency and comprehensive economic measures totaling 18.8 trillion yen.
The decline in employment and consumption has not been given sufficient attention. Only in 1994 was a one-time "special tax cut" for personal income tax, but it did not promote the growth of household employment and consumption. In 1990, Japan's effective job seeker ratio was 1.4 times, or 1.4 job openings per job seeker in the labor market, but it has fallen sharply since then, and did not exceed 1 time until 2005. As a result, the growth rate of private consumption in Japan fell rapidly from 4.8 percent in 1990 to no more than 3 percent in the following decade, and the Japanese economy, which had improved slightly in 1996, fell into recession again due to the superimposed impact of the tightening consumption tax policy and the Southeast Asian financial crisis.
Scenario 3: Lack of coordination between fiscal and monetary policies, and it is difficult to alleviate the "stagflation" impasse
The eurozone's unified currency and independent fiscal system make it difficult to eradicate the divergence between countries' fiscal policies, specifically the inability of national fiscal deficits to assist monetary policy, and the inability to control fiscal excesses. This contradiction was fully reflected in the worst moments of the European debt crisis in 2011-2012, and in recent years, the fierce game between eurozone countries over the burden of refugees and the fiscal austerity of some member states has also been rooted in this.
Under the impact of the epidemic and the conflict between Russia and Ukraine, the risks exposed by these issues are increasing significantly. Under the influence of geopolitical tensions, high energy prices, and weak global demand, eurozone member states have implemented their own fiscal policies, and it is difficult to pull the economy out of the slump. In February 2024, the industrial production index of the euro area was -6.4% year-on-year, retail sales growth was negative for 11 consecutive months, and the manufacturing PMI was below the boom and bust line for 21 consecutive months.
Scenario 4: Debt crisis, currency runaway, triggering hyperinflation
In the 70s, Latin American countries borrowed a lot of foreign debt to develop their economies, but with the rise in interest rates and the reversal of capital flows, the scale of debt continued to expand, triggering the Latin American debt crisis. Mexico declared itself unable to repay its foreign debt in 1982, followed by Brazil, Venezuela, Argentina, Peru and Chile, which have announced the termination or postponement of their external debt payments. Mexico did not reduce its fiscal deficit, which accounted for more than 9% of GDP in 1986-1988, seriously affecting economic development.
At present, the Federal Reserve maintains high interest rates and the dollar appreciates sharply, which makes the national bonds of some Latin American countries face the risk of default, which is somewhat similar to the Latin American debt crisis that broke out in the 80s of the 20th century. Argentina's inflation has been on the charts for a long time, with Argentina's full-year inflation rate reaching 211.4% for the whole of 2023, the worst performance since 1991, also due to the government's reliance on money printing to raise fiscal spending. Argentine President Milley artificially devalued the peso by 54% as soon as he took office, further exacerbating the inflation problem and triggering a sharp drop in domestic consumption. In the first quarter of 2024, Argentine beef consumption has fallen to its lowest level in 30 years.
3. How should China respond?
The different debt expansion patterns and economic development performance of the above-mentioned countries show that government debt management needs to look at debt beyond debt, and consider it in an overall way from the perspective of the overall pattern and cycle of economic development. In the author's view, these international lessons have the following three implications for the current government debt risks that China needs to deal with.
First, it is crucial to control the risk of government debt 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 leverage ratio of government departments rose to 56.7% (23.9% for the central government and 32.8% for local governments), which is lower than the international warning line of 60%. However, China's government debt risk is mainly reflected in the hidden debt of local governments. Considering that the market's estimate of the scale of local government implicit debt is roughly about 60 trillion yuan, plus about 40 trillion yuan of explicit debt, China's local government debt can reach a maximum of about 100 trillion yuan, and the leverage ratio of local governments is about 80%, and the debt scale is not low. In particular, since the second half of 2021, the real estate market has continued to decline, and the income from land sales of local governments has shrunk significantly.
However, the management of debt risks needs to be combined with economic development, especially to guard against a downturn in economic growth. In the first quarter, the actual GDP growth rate of 5.3% year-on-year exceeded market expectations, but the main economic indicators in March generally declined year-on-year and month-on-month compared with January-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 decreased by 7.1% year-on-year, and personal income tax decreased by 4.5% year-on-year). These show that the current pressure on China's economic steady growth is still great. The lessons of these countries show that controlling government debt cannot be done at the expense of economic growth, otherwise the gains outweigh the losses.
The author believes that at present, it is necessary to promote the standardized management of government debt and promote economic growth. On the one hand, it is necessary to increase the expenditure of the central government to alleviate the downward pressure on the economy in an all-round way, and to replace the expenditure that should have been borne by the central government in the early stage through transfer payments, so as to ease the pressure on local government debt repayment; on the other hand, it is necessary to systematically plan and promote a new round of reform of the fiscal and taxation system, better balance the division of administrative and financial powers between the central government and local governments, standardize the channels and use of funds for local government debts, and improve the local government debt management mechanism.
The second is to control the scale of debt, and more importantly, to raise the nominal economic growth rate through joint policy efforts.
The CPI fell to 0.1% year-on-year in March due to the post-holiday price drop in food and mobility services and the sluggish price of durable consumer goods, while the PPI fell to -2.8% year-on-year as the price of industrial goods (steel, cement, coal, etc.) fell. Correspondingly, real GDP grew by 5.3% in the first quarter of 2024, but nominal GDP growth was only 4.2%, and the GDP deflator was -1.1% in the first quarter, which was negative for four consecutive quarters. Debt repayments are nominal rather than real, and prices continue to be sluggish, and nominal GDP growth continues to be lower than real GDP growth, further increasing the debt pressure on government departments.
To alleviate debt pressure, macroeconomic policies need to reverse the inversion of nominal and real economic growth as soon as possible. Learning from the lessons of the Japanese economy for 30 years, on the one hand, although since 2024, the central bank has successively lowered the rediscount rate on relending and refinancing to support small rural support, lowered the deposit reserve ratio, continuously increased the amount of medium-term lending facilities (MLF), and the 5-year LPR has also been sharply reduced, but the CPI increase is far from the 3% set in the government work report On the other hand, in the context of high local government debt pressure, a proactive fiscal policy requires the central government to increase spending to drive demand and CPI to rebound, and pull 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 experiences and lessons of the above-mentioned countries, in the face of the problem of insufficient demand, it is necessary to coordinate active fiscal policy and loose monetary policy on the one hand, and to coordinate fiscal expenditure in stimulating investment and consumption on the other hand. As the author estimates in this column "Four Key Points of the 2024 Government Work Report", the actual deficit rate of the mainland in 2024 will be about 8.2%, and the intensity of fiscal expenditure in a broad sense is not low. However, in the process of implementation, it is necessary to consider the impact of the real estate downturn on the income from land transfer and the debt repayment restricting the spending capacity of local governments.
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, we should also increase fiscal support for boosting consumption, especially to increase the central government's subsidies for the trade-in of consumer goods, focusing on solving the problem of weak recovery of physical consumption (the year-on-year growth rate of retail sales in March was only 2.7%), so as to drive a virtuous cycle of supply and demand.
The views expressed in this article are solely those of the author
Editor-in-charge: Xu Jin [email protected]
图片来源 Getty Images
