What we know about the general government’s balance sheet in China: IMF
As in other emerging market economies, incomplete information prevents a full assessment of the fiscal buffers in China, according to IMF's latest report.
However, preliminary estimates suggest the general government’s net financial worth could range between 0 and a negative 23 percent of GDP, better than that in other emerging market economies.
Nonfinancial assets may provide additional buffers, but the extent of contingent liabilities and age-related spending increases are important sources of vulnerability.
With high and rising corporate debt and potential contingent liabilities from the financial sector and state-owned enterprises (IMF 2016d), it is important to assess the strength of the general government’s balance sheet in China to facilitate a necessary adjustment.
While it is often difficult to estimate the general government’s net financial worth in emerging market economies given the dearth of information especially on the asset side, in the case of China, shortcomings in data on the fiscal accounts and an intricate network of cross-financing make this task particularly challenging:
• Liabilities. Until recently, a significant amount of liabilities associated with off-budget local infrastructure spending, which benefited from implicit or explicit government guarantees, was not included in debt aggregates. Under the 2015 budget law, aimed at improving transparency of local government finances, about 20 percent of GDP of these liabilities have been explicitly recognized as part of China’s general government debt, resulting in a doubling of the debt ratio. An additional 12 percent of GDP has been recognized as contingent government liabilities. Nevertheless, there may be other off-budget contingent liabilities incurred in 2015, estimated at 5 percent of GDP, that have yet to be acknowledged.
• Assets. Available estimates suggest that the general government’s largest financial asset is related to its participation into state-owned enterprises (Chinese Academy of Social Science 2015; Xu and Zhang 2014; People’s Bank of China), but detailed data about the government’s total holding of equity in state-owned enterprises is not publicly available.
A first attempt to estimate the general government’s net financial worth suggests that it is between a positive 3 percent and a negative 23 per- cent of GDP, better than the negative 24 percent on average in other emerging market economies (Figure 1.1.1). In particular, at the end of 2015, financial liabilities amounted to 38–55 percent of GDP (depending on whether off-budget and contingent liabilities are included).
Financial assets (comprising deposits in financial institutions—5 percent of GDP—and equity holdings in state-owned enterprises) are estimated at between 32 and 41 percent of GDP. This wide range is related to significant uncertainties regarding the valuation of state-owned enterprises, as many of them are not traded.
On the basis of these enterprises’ net asset positions, the government’s equity holdings could be worth around 36 percent of GDP.2 A more conservative assumption based on their profitability would reduce this estimate to 27 percent of GDP.
The general government’s net financial worth may not, however, give a full picture of the available buffers. Ideally one would like to look at the public sector (including the central bank), but limitations of available data on public corporations, including estimates of the value of implicit government guarantees, preclude a full assessment.
In addition, other nonfinancial assets and other contingent liabilities of the general government should be accounted for. For example, the value of land ownership (a nonfinancial asset) estimated by computing the net present value of net use right fees for the next 25 years could be up to 51 percent of GDP. On the other hand, under current policies, estimated increases in age-related spending (following the methodology in Clements and others 2015) would amount to 128 percent of GDP in net present value terms.
Also, contingent liabilities such as potential losses on corporate loans from rapid and inefficient credit expansion may put further pressure on the fiscal accounts (April 2016 Global Financial Stability Report). Additional losses can be expected in other parts of the financial system, especially in shadow credit products.
Limited information makes it difficult to manage risks and can lead to markets’ overreaction to policy changes. From that perspective, a priority for China should be to strengthen its fiscal risk analysis and management framework, starting with a clear and transparent identification of assets, liabilities, and exposures.
Full implementation of the 2015 budget law would be a step in this direction. Once risks are identified and quantified, tools to mitigate risks (including limits on exposures, regulations, and a mechanism to transfer risks) could be considered, along with decisions about risk provisions, contingency budgeting, and buffer funds.