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China’s honesty about its whopping debt

The ruling party admits its difficulty in reining in a credit-fueled economy with too many ‘zombie’ firms and a housing bubble. The truthfulness goes halfway toward making reforms than can drain the red ink.

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AP Photo
People walk past a sign outside of the SinoSteel Corp. headquarters in Beijing. Drowning in debt, metals trader Sinosteel Corp. got an unprecedented lifeline from the Chinese government, a multibillion-dollar debt-for-equity rescue that could be the first of many for struggling state-owned companies.
  • By The Monitor's Editorial Board

Since taking power in China five years ago, President Xi Jinping has made three important confessions, a rarity for the ruling Communist Party. First, he admitted corruption was rampant and launched a purity campaign within the party. Then he revealed that official statistics about the economy were often exaggerated and has since produced more accurate figures.

The latest confession has been the most difficult and yet the most critical: China has far too much debt, both for its own stability and perhaps the global economy.

Last week Mr. Xi promised to tackle the debt issue this year and ordered financial regulations to meet “international standards.” He noted an addiction to easy credit among the thousands of government-owned enterprises, many of which are known as “zombie companies” for their losses and excess capacity. And he criticized a price bubble in the property market, which is also driven by loose credit. “Houses are built to be lived in, not for speculation,” Xi said.

Being truthful about China’s debt is halfway to solving the problem. But the next step must be less control by the party in how capital is doled out to different industries and to let private markets allocate credit based on risk and reward. That is a difficult reform for the Communist Party, whose historic claim to being the sole authority over China rests on a belief that it must control much of the economy rather than let the people decide.

The Chinese economy has slowed to its lowest pace in a quarter century, in part because investors are wary of the rapid rise in debt. Since 2007, or just before the global financial crisis, the country has added about $24 trillion in debt. About 40 to 50 percent of new debt is now used to pay off old debt.

Debt has been a useful tool for China’s fast climb as a global exporter. It is now the world’s second-largest economy. And its currency is more accepted in international credit. Xi’s confessions, along with his corrections, may help ensure a stable path of progress for China. Transparency in governance is its own form of power.

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