China’s Fiscal Sustainability: A Comment

27 Pages Posted: 23 Feb 2010

See all articles by Dan Ciuriak

Dan Ciuriak

Ciuriak Consulting Inc.; Centre for International Governance Innovation (CIGI); C.D. Howe Institute; Asia Pacific Foundation of Canada; BKP Development Research & Consulting GmbH

Date Written: December 1, 2004

Abstract

China has become a major "fear factor" in the global economy: there is fear of its competitive pressure on global markets and on demand for resources, and there is fear of the consequences for global growth if its economy hits a serious speed bump. China is usually given pretty good marks for macroeconomic policy management, with moderate budget deficits and manageable on-balance sheet debt. Its fiscal challenges are usually seen as one of debt sustainability, with the main fear factor for the medium term being contingent liabilities arising from non-performing loans in the banking system and, for the longer term, unfunded pensions. Sustainability of government debt is perhaps the ultimate test the viability of an economic framework. If growth is underwritten by an accumulation of debt, whether on the public accounts as the result of open subsidies or as contingent government liabilities in the banks and social insurance funds, the usual consequences are a currency and/or banking sector crisis coupled with a surge in inflation that writes down the value of existing financial assets and liabilities. Is China facing such a future fiscal threat? The conclusion reached here is that concern with contingent liabilities stemming from non-performing loans in the banking sector is overblown and China may actually have a favourable net asset position. Nonetheless, China's public sector faces looming medium-term spending pressures that will put great pressure on it to raise taxes. And, as is well known, tax reform is hard, especially in a setting such as China's with a "low trust" society and a decentralized administrative structure with responsibility for social risks concentrated at the provincial level, which necessitates the establishment of an effective fiscal framework for sharing revenue while maintaining overall fiscal discipline. In addition, China approaches the next global downturn with much less flexibility to address macroeconomic stabilization through SOE expenditures financed by state-owned banks. The pressure on open deficit financing will be much greater; moreover, China has no experience in managing its rapidly changing economy by standard macro tools alone. Successful fiscal reform is thus a key to China’s ability to sustain its economic success.

Keywords: China, fiscal, contingent liabilities, non-performing loans, tax reform

JEL Classification: H60, H62, H63

Suggested Citation

Ciuriak, Dan, China’s Fiscal Sustainability: A Comment (December 1, 2004). Available at SSRN: https://ssrn.com/abstract=1556021 or http://dx.doi.org/10.2139/ssrn.1556021

Dan Ciuriak (Contact Author)

Ciuriak Consulting Inc. ( email )

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Ottawa, Ontario K1N 6H9
Canada

Centre for International Governance Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

C.D. Howe Institute ( email )

67 Yonge St., Suite 300
Toronto, Ontario M5E 1J8
Canada

Asia Pacific Foundation of Canada ( email )

Canada

HOME PAGE: http://ciuriakconsulting.com/

BKP Development Research & Consulting GmbH ( email )

Romanstrasse 74
München, 80639
Germany

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