Dwarkesh Patel: belief

Transcript context

…teful projects that didn't deliver a good return. Now they've been struggling for the last decade to unwind that. But it's important to understand that the underlying model was actually an okay model. It just wound up being done in a way that was completely uncoordinated and excessive. You didn't have incentive structures that enabled local governments to rein it in when they needed to. So I still think that that is fundamentally a local government fiscal problem, which ultimately is a central government fiscal problem. If you look at the consolidated balance sheet of the central and local governments, put all together, China's government debt is still probably less as a share of GDP than US federal government debt. The US is over 100%, China is probably under 100%. So my previous guest, Victor Shih, estimated that the local government debt alone is somewhere between 100-150% of GDP. If you add it to the central government debt, I think he estimated that government debt in China is 200% of GDP. I would respectfully disagree with Victor on that. It's impossible to know for sure. You have the problem of formal debt, which is debt issued by government entities, and then you have contingent debt, which is debt issued by corporations that may or may not essentially be fronts or windows for local governments. There is also a very significant problem of double counting, which is hard to resolve. Debt gets counted at different levels in the system. It's one piece of debt, but depending on how long the chain is, it gets counted in various different places. I've long had the view that many of these much larger estimates of debt don't fully account for the double counting problem. It's quite possible that the true debt level is higher than what we think it is. It's unlikely, in my opinion, to be as high as Victor says it is. It also matters what the debt goes to and who is actually formally responsible for paying it. Are there project flows or income flows that can be used to pay for it? The structure of the servicing of the debt matters. At the end of the day, we do have a pretty good sense from the macro data of how much total debt there is in the economy. It's on the order of 300% of GDP. So if you want to say that government debt is 200% of GDP, then unless you're double counting, you're basically saying that everything else is a lot less than you think it is.…

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