CLSA How does China, the world’s biggest creditor, view this debt build up?

“Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets” Peter Lynch

These days, there seems to be only one solution any slowdowns / problems, that is just throw more money at it. A special feature from Central Banks' ability to just print. Just like Bond has a license to kill, Central Banks have the license to rob savers gracefully through inflation. Well, understandably, the only way a ponzi-scheme can survive is to let it grow bigger and faster. Being it debts of individuals, corporate, and countries which now intertwined such that all just got too big to fail If the economy is in recession, let the government go into deficit to bolster spending.

Average total debt (private and public sector combined) in ten developed countries rose from 200% of GDP in 1995 to 300% in 2008. In extreme cases like Iceland and Ireland, their debt to GDP ratios reached staggering 1,200% and 700% respectively. The only logical reason why anyone would lend them money is because they believe it will be paid back not by financial discipline but by with newly printed bills.

It is interesting to note that this week, China’s leading credit agency Dagong Global Credit Rating Company, stripped US, UK, Germany, and France of their AAA ratings, accusing their western competitors of ideological bias. Unlike backward looking credit agencies like Moodys, S&P, Fitch, the Chinese rating agency gave a much greater weight to wealth creating capacity. As such, China was upgraded to AA+ with Germany, Netherlands and Canada,

When most developed market economies went towards taking in more debts and face severe fiscal problems, Indonesia’s public debt to GDP went from 94% of GDP to 28% in one decade. Given that the government has $41bn in listed assets alone (5.8% of GDP), the unlisted assets would probably be worth at least that also. The point is: Indonesia's NET debt is considerably less than the headline. It is possible that the govt's real net debt is less than 10% of GDP. And yet our sovereign debt rating still rated junk status.

Despite the achievement of deleveraging and growth, President SBY calls for more discipline to reduce foreign debt. The estimated budget deficit this year is projected at 2.1% of GDP (About US$14.7bn). Separately, Finance Minister Agus Martowardojo has said that state ministries have only absorbed 35% of the state budget as of June 30. The govt historically speeds up expenditure spending in the second half of the year but has usually still falls short of spending the entire budget. What a stark contrast to developed nations!