This article provides a comprehensive explanation on how uncontrolled increase in public debts of the People’s Republic of China is likely to result into enormous economic crisis that will have stern impacts on economic growth and development of China. Huang defines public debt as the money borrowed by the government to finance its expenditures (27). Governments usually borrow money either domestically by issuing bonds and related securities or from foreign lenders such as foreign governments and financial institutions like the World Bank and International Monetary Fund (IMF). The money borrowed is often used to supplement revenue incomes in case of budget deficits. According to Huang, public debts are borrowings owed by both the central and local governments (33).
In this article, Ruchir Sharma starts by reviewing a previous warning by the Prime Minister of China, Wen Jiabao, who cautioned that the economy of China is quite unstable, unbalanced and may become more unsustainable if appropriate countermeasures are not taken to control the rate of increase in public debts. Wen Jiabao warned that the economy of China was highly dependent on heavy investments in infrastructure such as roads and manufacturing industries that aimed at making China economically powerful. However, this may not be achieved if the rate of increase in public debts was controlled and monitored effectively.
Sharma also explicates how top government officials in China attempted to stimulate economic growth by implementing massive investments which were largely financed by debts or borrowings. As a result, the government debt of china was quadrupled to more than 2.5 trillion U.S. dollars. In addition, the massive borrowings by the local governments also led to creation of a shadow banking system as the local governments failed to repay their loans. The author also gives an explanation on how the total public and private debts of China grew rapidly and surpassed the rate of growth of the Gross Domestic Product (GDP) thereby posing more financial risks to the economy of China. Sharma also discusses how high rate of increase of public and private debts in China is likely to result into financial and economic crisis similarly to economic crisis experienced in the United States between 2007 and 2008. The author supports his arguments using various measures such as the measure of rate of increase of total public and private debts and also draws practical examples from other countries like the United States of America, Japan, Korea and Spain that had been faced by economic crises due to uncontrolled increase in government debts. For example, the Bank of International Settlements recommends that the rate of increase of government debts as a share of the Gross Domestic Product (GDP) should not exceed six percent of its trend over the past decade (Dom & Wang 159). However, the rate of increase of government debts as a share of the GDP in China stands at twelve percent above its previous trend in the past decade. In my opinion, this hints a possibility of grave economic crisis in China. The International Monetary Fund also warns that private credit should not grow at a rate faster than the rate of growth of the economy within a period of three to five years. However, the rate of growth of private debts in China has been increasing rapidly at a faster rate than the rate of economic growth. This has resulted into a higher ratio of private credit to GDP. In my opinion, this high ratio also signalizes financial and economic crises in China in the future.
Last but not least, the article also discusses how most of the funds generated from public and private debts have been channeled to less productive sectors of the economic such as real state, thus leading to decline in productivity in China. According to Zheng and Tong, decline in productivity often leads to economic slowdown. Thus, China is also likely to face economic crisis due to the decrease in productivity.
For my part, I would assert that this article clearly elaborates how high government debt is likely to affect economic growth and development of a country. Moreover, it also elaborates how excessive investments can lead to economic slowdown if such investments do not result into corresponding increase in productivity. Therefore, it is important for governments to create a stable balance between investments and rate of increase in both public and private debts. I would also assert that intense increase in government debts is likely to impede economic growth and development. Therefore, central and local governments should adequately control the rate of increase of debts of the country.
To conclude, I would reaffirm that this article is highly resourceful and educative, and it provides invaluable insights on the effects of government debts on economic growth and development. In my opinion, the article is a must-read for anyone who has interest in understanding the relationship between government debts and performance of the economy.