China’s debt-to-GDP ratio is the sum of corporate debt, household debt, and government debt all together as a portion of GDP. This ratio is currently around 250 to 260 percent of GDP. Globally, China is in the middle of the pack – higher than most developing but lower than most developed. Now think about at China’s relative stage of development. It is right in the middle. Common sense then says that China’s debt ratio is where it should be.
Over the last 10 years, the debt ratio in China increased by 100 percentage points. Every country that has grown at that rate has had a financial crisis. Market watchers then argue that China will certainly crash. So why is it that China survived this period of rapid debt growth without a crash?
China did not have a private property market until the early 2000s. The Chinese people previously had housing provided by the state, but then housing was privatized. From 2004 onwards, land prices soared, driving up property values by 600 percent over the last 10 years.
However, China land prices are half the prices in comparable cities in India.
So the debt level rise is understandable and due to the unique initiation of private property. The pricing levels are reasonable and sustainable.
China’s domestic saving rate is 48% which amounts to almost $6 trillion of new savings each year. This also supports a higher safe debt level. China is borrowing its own savings.
State transferred $822 billion in land to private sector in 2017
Property developers’ demand for purchasing land grew as the property market destocked excessive inventories, pushing China’s total revenue from land transfer to surpass CNY5.2 trillion (USD822 billion)in 2017, setting a new high.
Property developers purchased 255 million square meters of land in 2017, up 15.8 percent from a year earlier.
Unbalanced growth in consumption and investment is because of the difference between rural and urban
Unbalanced growth is actually the key to China’s rapid growth. It is the result of rural to urban migration. Urbanization is good for economic growth. Rural to urban migration also explains why consumption shares have become so low and investment shares of income so high. In subsistence farming, households spend almost everything they produce and save very little. Those who move from rural to urban see their incomes triple over a few years and their savings rates skyrocket. Urban consumption as a share of industrial output is around 30% versus rural agriculture at 70%.
Hokou Reform would fix consumption balance and remove the trade surplus
Hukou restrictions put make 40% of those in chinese cities without state city medical, retirement and other benefits. They are illegal within their own country.
Removing hukou restrictions would boost consumption, by around 2% of GDP. Chinese urban “illegals” would get benefits and could spend more money without needing to save in case they get sick.
China’s current account surplus is approximately 2 percent of GDP, so this policy reform would turn China from a trade surplus to a trade neutral or deficit country.
China is introducing some points based system for allocating new Hukou. It is not clear how rapidly these and other policies will take to reach full allocation of Hukou and benefits. At end of 2017, the number of people holding Beijing hukou reached 13.6 million, while the city’s permanent population totaled 21.7 million in the same period.