In this interview with Nour Amache from Asharq Business Bloomberg, Christof Rühl, member of the Advisory Board of Crystol Energy and a Senior Fellow at the Center on Global Energy Policy at Columbia University, discussed the Chinese sub-national debt and the risks associated with it.
The worry about the Chinese sovereign rating should come last. Instead, we should look at the real problem in the shadow banking system in China and other financial activities that aren’t disclosed in the official Chinese statements. As long as prices go up, sub-national debt can be paid, but if the opposite occurs, stakeholders default and the crisis unfolds, affecting the whole economy (including the public sector). It is still not understood when a crisis will unfold and what the severity of it will be.
Christof added that there is no single country in the world that shifted from an industrialised to a financially-driven economy without passing through a financial crisis, and China is no different. The real risk is in the damage that will affect the Chinese economy. The severity and timing of the crisis will depend on the flexibility of the Chinese authorities to respond to the crisis. Historically, China is known for strong and centralised institutions which sometimes led to financial bubbles in the banking sector.