jamesphieffer.com: China's Debt Problem Worse than Portugal

By Elizabeth MacDonald - from FoxBusiness.com

Government officials in China, the largest foreign holder of U.S. debt, have been chastising the U.S. over Standard & Poor’s downgrade to AA+.

Guan Jianzhong, chairman of Dagong Global Credit Rating, has said the U.S. dollar is “gradually [being] discarded by the world,” and the “process will be irreversible.”

But China’s debt-to-GDP ratio is worse than the United States’ ratio. It is worse than insolvent Portugal, which is now relying heavily on the European Central Bank for help, and had to go to the International Monetary Fund to get a financial bailout.

The U.S.’s new AA+ rating from Standard & Poor’s is still higher than the one assigned to the Middle Kingdom. S&P has China’s debt rating stuck at AA-, the fourth highest level, due to its “sizable” contingent liabilities in its banking system.

China’s own system is jammed with rotten debt held in off-balance sheet state enterprises. Its countryside is littered with eerie, empty ghost towns. And Moody’s Investors Service says last month that China’s local debt was understated by hundreds of billions of dollars.

Despite that, the People's Daily said S&P’s downgrade of the U.S.'s credit rating "sounded the alarm bell for the dollar-denominated global monetary system.” China owns an estimated $1.16 trillion in U.S. debt. China prints yuan to hold down its value so as to keep its exports dirt cheap. It then uses that extra printed currency to buy U.S. debt.

Here are estimates to keep handy as this debate rolls along:

*China’s debt-to-GDP higher than Portugal’s ratio: China likes to say its debt-to-GDP ratio is 17%. Not so fast. The respected Beijing-based research firm Dragonomics says it is 89% of GDP, worse than Portugal’s 83% of GDP, and the U.S.’s 79% by 2015. Stephen Green, China economist at Standard Chartered Bank, figures China’s total debt, including contingent liabilities, is 77% of GDP. China’s balance sheet is notoriously murky.

*China's local government debt understated: It may be 3.5 trillion yuan ($540 billion), bigger than its state auditor has estimated, Moody's said last month.

Moody's said it discovered more potential loans after it found discrepancies in figures given to it by Chinese authorities. China's central bank alone holds an estimated $1.16 trillion in debt, and the government has already increased credit in the system to a reported 200% of GDP.