In China New Debts Are Used to Cover Old Debts - Scholar

China's local governments may have accumulated off-balance sheet debt amounting to 40 trillion yuan, according to an S&P Global Rating.

Sputnik has discussed China's debt with Dr. Oh Ei Sun, senior adviser for international affairs at the Asian Strategy and Leadership Institute in Kuala Lumpur.

Sputnik: What impact does this amount of debt have on the Chinese economy?

Dr. Oh Ei Sun: The debt levels as incurred by China, primarily domestically, this is actually not a new piece of news item because over the years, for example, the various local authorities in China, many of them, as well as local businesses they would have accumulated a lot of debt because debt financing is the primary way of the financing their businesses.

In the Chinese context very often, over the past, let's say, 10 years or so these high level of debts have been reported; but the Chinese economy instead has been going from strength to strength. I think that is primarily because, while China is still very much a corporatist state, sometimes the banks, the various financial institutions they could be ordered to, for example, to forgive some of these debts or to provide even more debt financing.

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So in the meantime, the economy grows. In Chinese, you say that you use the new debts to cover the old debts, and that's what they have been doing over the years here.

Sputnik: Do you think that this is a really a very risky model? I think this is a model that many countries around the world use.

Dr. Oh Ei Sun: It is a risky model if you're not China because in many countries a high level of debts plus business inactivities would indeed lead to sometimes even bankruptcy on a national level, not to mention business level. But in the case of China, you're talking about a whole society full of extremely entrepreneurial people or business people. So when their power of creativity is unleashed very often they're able to, as I said, use the new debts to cover the old debts here.

Sputnik: So you feel that China is much more immune to this than other countries' economies?

Dr. Oh Ei Sun: In a sense, that a lot of these debts are not foreign debts. I mean they're not indebted a lot, for example, to the JP Morgans or Citibanks and so on, but rather its indebtedness to many local financial institutions. So these debts in a sense could be sort of forgiven.

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There's a lot of impunity; it is also because, for example, they're running huge trade surpluses with various countries around the world including the United States. So we're not talking about, let's say, China owing a lot of money to some foreign banks.

Sputnik: How would you compare China's indebtedness to that of the US debt?

Dr. Oh Ei Sun: Both the Chinese indebtedness and the American indebtedness, in a sense, they are immune to the normal cost of economic discourse; because in a case of the United States, for example, because it is sort of the land of last resort, much like a central bank is to a country, therefore, it could also continue to incur debt, to snowball its debts with almost impunity.

The process is slightly different than that of China but the end result is the same. These two countries could afford to be indebted without much price to be paid here.

Sputnik: The media is really giving a pretty bleak prospect for China in regards to their debt, how justified are the media reports and, of course, this would also have to do with, probably, with increased trade wars and so forth, factor into that?

Dr. Oh Ei Sun: Well, of course at a personal level, at the national level countries would like to be free of indebtedness but the reality is that China does incur a lot of domestic debt. I think its authorities are not unaware of this. That's why you see a lot of calls for reforms or even forced reforms are being carried out; for example, for those state-owned enterprises which are not as well-known for their efficiency as the private enterprises here.

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The views expressed in this article are solely those of Dr. Oh Ei Sun and do not necessarily reflect the official position of Sputnik.