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Decades of unresolved debt pressures China's finances, yuan
China is highlighting its debt problems in order to deflect criticism of its exchange rate regime. Despite China's undisputed growing economic stature, the country remains mired in billions of dollars (could well be trillions) in debt that is pressuring its currency and financial system, the ministry of commerce says. The fiscal hangover from China's command economy days means the yuan faces significant pressure from hidden deficits worth trillions of yuan in non-performing loans (NPLs) and unfunded pension liabilities, it said. Although China has massive foreign reserves -- 659 billion dollars at the end of March -- the country's overall fiscal deficit is huge, the ministry said in a quarterly economic assessment report of the nation, posted on its website. These massive obligations will hamper efforts to keep the yuan firm over the longer term, said the ministry. China's target deficit for 2005 is 300 billion yuan, down 19.83 billion yuan from last year's fiscal budget, but it is at the same time facing "trillions of yuan in non-performing assets and pension fund liabilities in the country's financial system." The ministry did not give any specific figures but on Monday the China Banking Regulatory Commission reported that outstanding NPLs in the banking sector in the first quarter fell 3.56 billion yuan to 1.83 trillion yuan. China's pension liabilities are estimated to range in the hundreds of billions of dollars. Central bank governor Zhou Xiaochuan also warned this week that efforts to deepen bank reform would be tested during the next economic downturn and expressed fears that a debilitating problem with NPLs could return. The country has attempted to build a nationwide social security fund to take over the previous pension obligations of state-run companies, which took on retirement benefits of China's workers in the past. That system is no longer sustainable as China adopts market-driven policies and many state companies go out of business. Although the National Social Security Fund plans to invest up to one billion dollars overseas to boost its returns, the ministry called on Beijing to funnel foreign exchange reserves into international markets as well on behalf of the social security fund. Separately, the ministry defended China's record by saying that the nation may have a large trade surplus with the United States but the overall surplus with the rest of the world was not that big. "China's annual trade surplus is not that large and this shows that the yuan is not greatly undervalued," it claimed. Internal debt and its quality is not directly related to the exchange rate, although a banking crisis would undoutably drive own the level of the Yuan. Washington and several other trade partners have complained that China maintains the yuan at an artificially low level to give its exports an unfair advantage. And they are right. Posted by: phil_b 2005-05-20 |
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