The important question is not the quantity of debt, but the quality of how it is invested, and on this ground, I think S&P may be on the right track.
China has hit back strongly at S&P Global’s “perplexing” decision to downgrade the country’s sovereign credit rating… S&P was “neglecting China’s sound economic fundamentals and development potential”, the finance ministry said on its website yesterday, calling it a “wrong decision.” — SCMP, September 23
I agree that it was the wrong call if S&P made it purely on the basis that debt levels in the mainland are high relative to the size of the economy.
This is a frequent criticism with aggregate debt financing now at 163 trillion yuan (US$24.7 trillion/), the equivalent of more than 200 per cent of gross domestic product, but it is also a case of comparing apples to oranges.
Debt is a balance sheet figure. Gross domestic product is a cash flow figure. To put it in an equivalent personal context, if you are a homeowner, you at some point may have carried a mortgage debt of up to 1,000 per cent of your annual income and yet your bank thought this was just fine and you lost no sleep over it.
Of the two categories of financing — debt and equity — debt can easily be the better when interest rates are unusually low. The important question is not the quantity of debt, but the quality of how it is invested, and on this ground, I think S&P may be on the right track.
S&P pours cold water on Beijing’s upbeat economic narrative
Take, for instance, the estimated 5 trillion yuan spent on the high speed rail system. I say “estimated,” but I might as well say “wildly guessed”, as the financial picture is murky. Yet we are officially given to understand that high speed rail is a profitable investment.
