By contrast, if a country, let us say Greece as the poster child of bad public debt in the early 21st century, borrows to finance primarily luxury imports, defense, speculative enterprises, and all within a system of high level of public and private sector corruption, then such public debt is parasitic for it will not produce new wealth with which pay off the old debt. Therefore, one must look at the goal of capital formation in China is very different from that of Greece, or any Western nation, including the US where parasitic economics have been the cause of the economy's steady decline in the past half century.
It is true that China has a very low cost structure and a small consumption base - a small middle class, a very large working class and peasantry, and a very strong state that plays catalytic role in capital formation. Precisely because China has a state-directed (statist) production-oriented economy with cheap labor available and low consumption base it has been able to lift itself from underdevelopment to preeminent economic superpower status.
By contrast, Western economies are based on capital formation intended to benefit the very small and powerful private sector, against the background of a consumer-based economy where the state that transfers wealth from the productive classes to banks and corporations to keep them globally competitive. This is a salient factor in capital formation and in the public debt that Western nations have accumulated.
The latest controversy regarding China's public debt is the credibility of the official figures that Beijing provides, figures that no doubt lack credibility. While the central government aggregate debt is 17% of GDP in 2010, as far as official stats are concerned, private Western analysts estimate that China's debt-to-GDP ratio may be anywhere between 40 and 90%.
China's top auditor has warned about local governments using billions of dollars to finance infrastructural projects to the detriment of the banking system. However, even if China had a debt-to-GDP ratio that matched the US, China would retain its excellent credit rating while the US cannot, for the simple reason that the American-consumption-parasitic-defense sector oriented economy is headed for a long decline in this century while China's prospects are very bright. Again, we must focus on the modality and goal of capital formation, and not compare raw statistics as though economic, monetary, and fiscal conditions in China and the West are identical.
It is true that China has benefited from hundreds of billions of foreign capital that has massively strengthened capital formation, while such capital has been drained from the West where parasitic economics prevails. Furthermore, the Chinese government regards deficit financing as a means of growth, and it does not fear its own position, given that Japan, and practically every Western country is carrying massive public debt intended to strengthen banks and the corporate system that would have collapsed in the absence of government support.
That China is carrying the paper, which permits the US economy to grow and unlike the US and EU that have a meager GDP growth, means that China continues to lead the world in economic growth as well as economic and political leverage. Partly because it is enjoying balance of payments surplus, China can afford to have local and regional government run up debt as long as it is geared to establish an economic foundation. This does not mean that all of this is carried out free of corruption. In the past ten years, a number of organizations, among them the OECD, have warned about corruption among Chinese government officials, bankers, and others in state enterprises.
To diminish the Chinese government's fiscal credibility, many Western analysts, rating agencies, and financial firms have tried to argue that China's fiscal and monetary behavior has been as irresponsible toward a market-friendly world as that of the West. The way to prove this point is to argue that local and regional government in China has engaged in deficit spending that accounts for sharp rise in liabilities, especially when social security funds are taken into account.
That Chinese local and regional governments went on spending spree at the start of the US-based Western recession in 2008 actually helped to moderate the impact of that recession. If the Chinese were spending on luxury imports, defense, and other parasitic areas including speculative investment, the debt problem would indeed be very serious, especially given the very high level of corruption. Although China has laws to prevent local and regional government from violating balance budgets, there have been many ways that such laws were violated, helping to stimulate Chinese growth as well as keeping the world economy from suffering further decline.
China will continue to buy US bonds to finance the American consumption-parasitic-defense oriented economy, although for how long is difficult to predict. Offering the stimulus to global growth amid the recession of 2008-present, China was able to do so by keeping a very low foreign debt in comparison with the US and Western nations whose public debt is mostly in foreign hands.Again, I stress the key issue of modality and goal of capital formation, even with the prevalence of massive corruption.
That the issue of China's public debt is now raised by Western as well as some Chinese sources reveals more about the obsession of the neo-liberal trend to reduce the role of the state in the economy and strengthen finance capitalism that caused the global recession of 2008-present. Although the parasitic nature of speculative capitalism that works through manipulation of the markets is the cause of undermining the health of the economy, free market advocates insist that is the solution and the problem is the state.
Unlike most European countries and the US, which raise public debt levels to finance parasitic enterprises and defense, and which see capital formation as a means to sustain finance capitalism in its parasitic mode, China has pursued fiscal stimulus through its banks, a fact that kept the national economy growing at a rapid rate during the global recession and mitigated the recession's impact across the rest of the world. China invested in the real economy instead of allowing capital to be absorbed by the parasitic speculative sector.
Despite the seriousness of corruption, that is indeed much higher than Greece and closer to Haiti and Bangladesh, China has managed to compensate with rapid growth and keeping focused on the ultimate goal of capital formation. By contrast, Western debtor nations borrow to keep a private sector operating in parasitic system that accounts for continued decline. Despite all its problems regarding corruption and massive labor abuses, in the absence of China maintaining a productive-oriented regime where capital formation was directed to build the world's preeminent economy, the rest of the world economy would have been in much more serious trouble from 2008 to the present.