China unlikely to undergo local govt debt crisis

“Two ratios in the Maastricht Treaty, namely the government debt-to-GDP ratio of 60 percent and deficit-to-GDP ratio of 3 percent, have been used globally to determine the safety of government debt,” said Jia Kang, head of the research institute for fiscal science at China’s Ministry of Finance. Government debt is considered to be at a safe level if it is below the two internationally recognized “warning lines” or at a dangerous level if it exceeds the warning lines.

Jia said that China’s government debt-to-GDP ratio and deficit-to-GDP ratio are both relatively low according to the warning lines in the Maastricht Treaty, officially known as the Treaty on European Union. The country’s local government debts amounted to 10.7 trillion yuan at the end of 2010, accounting for about 27 percent of its gross domestic product (GDP). As its public sector debt as a percentage of GDP reached about 20 percent in nominal terms, China’s total government debt would amount to only around 50 percent of GDP, and be well within the safety zone, even if bonds issued by policy financial institutions were taken into account.

China has implemented a proactive fiscal policy in recent years, but its deficit-to-GDP ratio has never exceeded 3 percent. The ratio was slightly below 3 percent in 2009 and 2010, and dropped below 2 percent in 2011. As the country cut its 2012 budget deficit by 50 billion yuan, the ratio is expected to drop to around 1.5 percent this year, far below the 3 percent international warning line.

Under the Maastricht Treaty, every E.U. member state must bring its deficit-to-GDP ratio under 3 percent and debt-to-GDP ratio under 60 percent. However, the treaty did not work as well as expected. Almost all E.U. member states plagued by sovereign debt problems have amassed huge debts far exceeding the warning lines. The Greek debt crisis broke out when the country had a deficit-to-GDP ratio of more than 10 percent and a public sector debt-to-GDP ratio of around 125 percent.