National Debt Concept in Asian Countries

Topic: Economics
Words: 1112 Pages: 4

This article by D. Asteriou, K. Pilbeam, and C. Pratiwi “Public Debt and Economic Growth: Panel Data Evidence for Asian Countries” examines the concept of public debt in the context of Asian economies paying special attention to China and Japan. Public debt is the total amount owed by a state to its own and foreign individuals and entities. It consists of the total accumulated amount of budget deficits, minus budget surpluses, the amount of financial obligations to foreign creditors) at a certain date. The concepts of internal and external national debts are analysed in the article. Moreover, the authors describe the general notion of a national debt; it is formed by the temporary mobilization of additional funds by the state to cover its expenditures by issuing government loans.

External public debt is a country’s debt to states, individuals, and entities in other countries. The external public debt of the country is formed by the totality of its financial obligations to foreign creditors on loans granted to the Government or under the guarantee to be repaid in due time and on pre-agreed terms (Still, 2022). External debt can appear for two main reasons: as a result of direct borrowing from foreign countries and private companies and through the sale of government securities to foreign legal entities and individuals, and states (McConnell et al., 2020). The presence of foreign debt leads to the loss of part of the national product and a decline in the prestige of the country.

Domestic public debt refers to the debt of the government of the country to legal entities and individuals, formalized by fixed-term debt obligations. The government borrows to finance budget deficits; according to its material content, domestic public debt is the amount of issued, but not repaid, monetary liabilities expressed in bonds and other securities. The authors of the article note that China’s yuan-denominated domestic debt has three components: corporate, household and public debt (Asteriou et al., 2021). Corporate debt includes loans from the private sector and state-owned companies, while China’s public debt is a combination of national and local government debt. Household debt is the combined debt of ordinary Chinese, and it is divided into consumer and mortgage debt. China’s external debt in currencies other than the renminbi include loans to private sector firms from foreign banks, loans to Chinese firms from foreign trading partners related to trade, and debt securities issued by Chinese public and private companies to foreign investors.

The bulk of the debt is official lending coming from the government and state-controlled companies. Over the years, China has actively lent to emerging economies such as those in Africa and Latin America (Dollar et al., 2020). China is a major holder of U.S. Treasury bonds, effectively financing the federal deficit in the United States. The Institute of International Finance (IFF) estimates that China’s total domestic debt in the first quarter of 2020 was 317% of GDP, up from 300% in the last quarter of 2019, the largest quarterly increase in recorded history (Dollar et al., 2020). China is expanding its overseas projects financed by government loans under the Belt and Road Initiative, an ambitious infrastructure investment plan to build rail, road, sea, and other routes stretching from China to Asia, Africa and Europe.

China’s consumer debt is the fastest-growing segment of total debt, especially in the form of mortgages and consumer loans. According to the IFF, household debt rose from 51.4% in the last quarter of 2018 to 54.3% of China’s GDP in the last quarter of 2019 (Enfu, 2021). China’s external debt, reached $2.05 trillion at the end of 2019, according to the State Administration of Foreign Exchange of China (Enfu, 2021). The article also notes that China’s Local Government Debt is the largest. China’s local governments have relied on off-balance sheet borrowing through local government finance facilities for decades.

Many of these borrowings are unrecorded, and transparency is weak when it comes to the use of funds. Standard & Poor’s estimates that such hidden debts are between 30 trillion yuan ($4.2 trillion) and 40 trillion yuan (Looney, 2022). China issued 4.36 trillion yuan ($614 billion) in local government bonds in 2019 (Looney, 2022). Most of this borrowing is owned by domestic investors such as commercial banks, followed by state banks, whose investment and lending practices support government policies such as issuing bonds to raise funds for infrastructure investments and insurance companies. Overseas investment gives China the opportunity to increase trade and business, stimulating its own economy. The foreign policy adopted by Beijing allows China to use its economic power to increase its influence abroad. Thus, China’s level of foreign debt will also be influenced by its foreign policy goals.

In Japan, government bonds are issued to cover government expenditures and, along with taxation, act as a source of funds to cover the budget deficit. On the other hand, government debt service accounts for about 22% of the country’s budget expenditures1 (Schaede, 2020). The growth of these payments is becoming an increasingly serious burden on the budget, and the significant issuance of bonds cannot but have a negative impact on the state of public finances (Asteriou et al., 2021). Japan has never raised the question of setting a ceiling on public debt. The growth of the country’s public debt is limited by certain regulations, particularly the principle of “pay as you go” in the formation of budget expenditures (Schaede, 2020). Despite the IMF’s pessimistic view, investors continue to actively buy Japanese government debt.

Apparently, investors’ behavior is influenced by the strengthening of the neo-Keynesian position in global economic science, which considers domestic debt safe, assuming that budget expenditures can be equal to the sum of tax revenues and domestic debt. Since Japanese sovereign liabilities are 95% domestic debt, Japanese government debt is not a serious concern. In addition, investors take into account the sustainability of the country’s financial and economic potential and even some of its strengthening due to international banking operations and foreign direct and portfolio investments. In practice, this principle is violated with reference to “special socio-economic requirements.

Thus, there is reason to assume that government bonds will continue to dominate the Japanese debt market for a long time to come. Although the volume of this type of borrowing is large, a high degree of confidence in Japanese finances will remain both at home and abroad due to the competent, cautious and conservative financial system built by the national bank. Despite the impressive scale of the national debt, economists do not predict default in Japan. Therein lies the main difference in the situation of public debt in China, which, given unfavorable economic factors, can lead the country to financial insolvency.

References

Asteriou, D., Pilbeam, K., & Pratiwi, C. (2021). Public debt and economic growth: Panel data evidence for Asian countries. Journal of Economics and Finance, 45(2), 270–287.

Enfu, C. (2021). China’s economic dialectic. International Publishers Co.

Dollar, D., Huang, Y., & Yao, Y. (2020). China 2049: Economic challenges of a rising global power. Brookings Institution Press.

Looney, R. (2022). China’s belt and road initiative at ten: Country Experiences in the America, Oceania and Asia. Routledge.

McConnell, C., Brue, S., & Flynn, S. (2020). Macroeconomics (22nd ed.). McGraw Hill.

Schaede, U. (2020). The business reinvention of Japan: How to make sense of the new Japan and why it matters. Stanford Business Books.

Still, B. (2022). No more national debt (2nd ed.). Reinhardt & Still.