More stuff on fiscal stimulus ... this time from China

Almost on cue, the next thing I read on fiscal stimulus was a story from the NYT on the growth of debt in China: Local Debt in China Worries Its Auditor. See previous post.

What it shows is the need for balance. Advocates of fiscal stimulus cannot deny the tendency towards rent-seeking and inappropriate borrowing that occurs alongside monetary and fiscal stimulus.

SHANGHAI — China won praise last year for reviving domestic growth with aggressive bank lending and a $586 billion economic stimulus package. But now the nation’s top auditor is warning that the mounting debt of local governments could undermine the recovery in some parts of the country. 

Li Jiayi, head of the National Audit Office, said in a report to the legislature this week that borrowing by local governments had created public debt burdens totaling hundreds of billions of dollars. The report questions whether those governments have the resources to pay down the loans.

The warning is the latest indication that a portion of the government-backed loans and stimulus money could eventually be categorized as bad loans.

Once again there is no agreement on the extent of the problem.

It is unclear how serious a threat local government debt is to China’s booming economy. Some economists say the nation’s debt pales in comparison with that of the United States and Europe and that worries about record bank lending last year turning into mountains of bad debt are exaggerated.

Nicholas Lardy, an economist at the Peterson Institute for International Economics in Washington, said in a column this week in The Wall Street Journal that many of the worries were misplaced. He said that China was smart to invest in infrastructure projects last year and that if debts mounted, local government could service the debt by raising fees on water and subways.

But on Thursday Fitch Ratings, the credit rating agency, warned that record loan growth and aggressive efforts by state-run banks to repackage and sell debt to investors had raised credit risks in the country and could “lead to another financial crisis,” according to a report published by Bloomberg News.

In a release issued Wednesday by Fitch, Charlene Chu, the firm’s senior director for financial institutions in China, said that the financial positions of Chinese banks were more strained than they appeared to be and that “future asset quality deterioration is a near certainty.”