Share on Google Plus Share on Twitter Share on Facebook 1 Share on LinkedIn Share on PInterest Share on Fark! Share on Reddit Share on StumbleUpon Tell A Friend 9 (10 Shares)  
Printer Friendly Page Save As Favorite View Favorites View Article Stats   4 comments

OpEdNews Op Eds

HOW CHINA BUYS OUR DEBT WHILE BURYING ITS OWN

By (about the author)     Permalink       (Page 1 of 2 pages)
Related Topic(s): ; ; ; ; ; ; ; , Add Tags Add to My Group(s)

Must Read 3   Well Said 3   News 2  
View Ratings | Rate It

opednews.com Headlined to H2 10/30/10

Become a Fan
  (159 fans)

China may be as heavily in debt as we are. It just has a different way of keeping its books -- which makes a high-profile political ad sponsored by Citizens Against Government Waste, a fiscally conservative think tank, particularly ironic. Set in a lecture hall in China in 2030, the controversial ad shows a Chinese professor lecturing on the fall of empires: Greece, Rome, Great Britain, the United States . . . .

"They all make the same mistakes," he says. "Turning their backs on the principles that made them great. America tried to spend and tax itself out of a great recession. Enormous so-called stimulus spending, massive changes to health care, government takeover of private industries, and crushing debt."

Of course, he says, because the Chinese owned the debt, they are now masters of the Americans. The students laugh. The ad concludes, "You can change the future. You have to."

James Fallows, writing in the Atlantic, remarks:

"The ad has the Chinese official saying that America collapsed because, in the midst of a recession, it relied on (a) government stimulus spending, (b) big changes in its health care systems, and (c) public intervention in major industries -- all of which of course, have been crucial parts of China's (successful) anti-recession policy."

That is one anomaly. Another is that China has managed to keep its debt remarkably low despite decades of massive government spending. According to the IMF, China's cumulative gross debt is only about 22% of 2010 GDP, compared to a U.S. gross debt that is 94% of 2010 GDP.

What is China's secret? According to financial commentator Jim Jubak, it may just be "creative accounting" -- the sort of accounting for which Wall Street is notorious, in which debts are swept off the books and turned into "assets." China is able to pull this off because it does not owe its debts to foreign creditors. The banks doing the funding are state-owned, and the state can write off its own debts.

Jubak observes:

"China has a history of taking debt off its books and burying it, which should prompt us to poke and prod its numbers. If we go back to the last time China cooked the national books big time, during the Asian currency crisis of 1997, we can get an idea of where its debt might be hidden now."

The majority of bank loans, says Jubak, went to state-owned companies -- about 70% of the total. The collapse of China's export trade following the crisis meant that its banks were suddenly sitting on billions in debts that were clearly never going to be paid. But that was when China's largest banks were trying to raise capital by selling stock in Hong Kong and New York, and no bank could go public with that much bad debt on its books.

The creative solution? The Beijing government set up special-purpose asset management companies for the four largest state-owned banks, the equivalent of the "special purpose vehicles" designed by Wall Street to funnel real estate loans off U.S. bank books. The Chinese entities ultimately bought $287 billion in bad loans from state-owned banks. To pay for the loans, they issued bonds to the banks, on which they paid interest. The state-owned banks thus got $287 billion in toxic debt off their books and turned the bad loans into an income stream from the bonds.

Sound familiar? Wall Street did the same thing in the 2008 bailout, with the U.S. government underwriting the deal. The difference was that China's largest banks were owned by the government, so the government rather than a private banking cartel got the benefit of the arrangement. According to British economist Samah El-Shahat, writing in Al Jazeera in August 2009:

"China hasn't allowed its banking sector to become so powerful, so influential, and so big that it can call the shots or highjack the bailout. In simple terms, the government preferred to answer to its people and put their interests first before that of any vested interest or group. And that is why Chinese banks are lending to the people and their businesses in record numbers."

In the US and UK, by contrast:

"[B]anks have captured all the money from the taxpayers and the cheap money from quantitative easing from central banks. They are using it to shore up, and clean up their balance sheets rather than lend it to the people. The money has been hijacked by the banks, and our governments are doing absolutely nothing about that. In fact, they have been complicit in allowing this to happen."

Today, Jubak continues, China's debt problem is the thousands of investment companies set up by local governments to borrow money from banks and lend it to local companies, a policy that has produced thousands of jobs but has left an off-balance-sheet debt overhang. He cites economist Victor Shih, who says local-government investment companies had a total of $1.7 trillion in outstanding debt at the end of 2009, or about 35% of China's GDP. Banks have extended $1.9 trillion in credit lines to local investment companies on top of that. Collectively, the debt plus the credit lines come to $3.8 trillion. That is about 75% of China's GDP, which is proportionately quite a bit smaller than U.S. GDP. None of this is included in the IMF's calculation of a gross-debt-to-GDP figure of 22%, says Shih. If it were, the number would be closer to 100% of GDP.

Next Page  1  |  2

 

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)
 

Share on Google Plus Submit to Twitter Add this Page to Facebook! Share on LinkedIn Pin It! Add this Page to Fark! Submit to Reddit Submit to Stumble Upon

The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Follow Me on Twitter

Contact Author Contact Editor View Authors' Articles

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

It's the Derivatives, Stupid! Why Fannie, Freddie and AIG Had to Be Bailed Out

Mysterious Prison Buses in the Desert

LANDMARK DECISION PROMISES MASSIVE RELIEF FOR HOMEOWNERS AND TROUBLE FOR BANKS

Libya: All About Oil, or All About Central Banking?

Borrowing from Peter to Pay Paul: The Wall Street Ponzi Scheme Called Fractional Reserve Banking

"Oops, We Meant $7 TRILLION!" What Hank and Ben Are Up to and How They Plan to Pay for It All

Comments

The time limit for entering new comments on this article has expired.

This limit can be removed. Our paid membership program is designed to give you many benefits, such as removing this time limit. To learn more, please click here.

Comments: Expand   Shrink   Hide  
3 people are discussing this page, with 4 comments
To view all comments:
Expand Comments
(Or you can set your preferences to show all comments, always)
Ancient Israel allowed for the jubilee forgiveness... by Gary Anderson on Sunday, Oct 31, 2010 at 1:59:21 PM
I'm calling for the Jubilee, too, Gary. Based on J... by Vernon Huffman on Monday, Nov 1, 2010 at 10:22:04 AM
I wrote this passage yesterday:"Let's look at the ... by Vernon Huffman on Sunday, Oct 31, 2010 at 9:26:08 PM
Why does China's stimulus spending and investing i... by Mari Eliza on Tuesday, Nov 2, 2010 at 2:19:13 AM