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April 25, 2013, 5:34 a.m. ET
China Assets May Offset Debt Worries
By TOM ORLIK
China's debt is scary, but its assets are reassuring.
Taken together with local government borrowing and other obligations, China's gross government debt could be as much as 60% of gross domestic product, says UBS China economist Wang Tao. Corporate and household debt has also been on a tear, rising to up to 201% of GDP at the end of the first quarter from 138% at the end of 2008, according to Bernstein Research.
![[image]](http://si.wsj.net/public/resources/images/AM-AY239_CHINAH_NS_20130425043302.jpg)
Those are alarming trends. But debt is only half of the story. On the other side of China's balance sheet, there are some significant assets.
The net assets of state-owned enterprises reached 27.3 trillion yuan ($4.4 trillion) in 2011, equal to 58% of GDP in that year, says Dragonomics China analyst Andrew Batson. The state is also a major owner of land. China's public sector is out of the red, even without taking account of massive foreign-exchange reserves, which couldn't easily be used to bail out domestic problems.
For the corporate sector, assets have grown in line with liabilities. Take the firms listed in Shanghai, China's flagship equity market. The asset-to-liability ratio for this group rose to 118% in 2012 from 113% in 2007, according to FactSet.
Industrial overcapacity and reckless building by local governments mean some of China's investment hasn't been valuable. A bridge to nowhere isn't easy to bank. In a crisis, political paralysis and illiquid markets mean selling assets would be tough—Latin American countries discovered as much during debt crises in the 1980s and 1990s.
Still, China's strong asset base points to a fundamental difference with the buildup of debt in the U.S. Borrowing to fund consumption—the U.S. model—doesn't create a stream of future income or an asset that can be used for repayment. Borrowing to fund investment—the China model—does.
Taken together with local government borrowing and other obligations, China's gross government debt could be as much as 60% of gross domestic product, says UBS China economist Wang Tao. Corporate and household debt has also been on a tear, rising to up to 201% of GDP at the end of the first quarter from 138% at the end of 2008, according to Bernstein Research.
Those are alarming trends. But debt is only half of the story. On the other side of China's balance sheet, there are some significant assets.
The net assets of state-owned enterprises reached 27.3 trillion yuan ($4.4 trillion) in 2011, equal to 58% of GDP in that year, says Dragonomics China analyst Andrew Batson. The state is also a major owner of land. China's public sector is out of the red, even without taking account of massive foreign-exchange reserves, which couldn't easily be used to bail out domestic problems.
For the corporate sector, assets have grown in line with liabilities. Take the firms listed in Shanghai, China's flagship equity market. The asset-to-liability ratio for this group rose to 118% in 2012 from 113% in 2007, according to FactSet.
Industrial overcapacity and reckless building by local governments mean some of China's investment hasn't been valuable. A bridge to nowhere isn't easy to bank. In a crisis, political paralysis and illiquid markets mean selling assets would be tough—Latin American countries discovered as much during debt crises in the 1980s and 1990s.
Still, China's strong asset base points to a fundamental difference with the buildup of debt in the U.S. Borrowing to fund consumption—the U.S. model—doesn't create a stream of future income or an asset that can be used for repayment. Borrowing to fund investment—the China model—does.
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