Which Chinese City Will Become the Next Detroit?

Which Chinese City Will Become the Next Detroit?

Where is China’s Detroit? A few weeks ago, the answer to that question would have been an optimistic shortlist of towns with thriving automobile industries. But since Detroit filed for bankruptcy on July 18, the question has become this: Which Chinese city will be the poster child for the country’s growing multitrillion-dollar local-government-debt problem?

In 2010, China’s National Audit Office announced that local governments had amassed a debt of $1.73 trillion, driven largely by borrowing for construction, infrastructure and debt service. Easy credit meant to avert the worst of the global financial crisis only served to worsen the problem: Local debt will grow to $2.63 trillion by the end of the year, equal to 29 percent of gross domestic product, according to Huatai Securities Co. Ltd. A 2012 audit of 36 local governments found $624.6 billion in debt — suggesting there are at least a few Chinese cities with debt equal to, or in excess of, the $18 billion that sunk Detroit.These facts have been covered extensively in China’s financial press for several years without making much of an impression outside of it. But in the almost two weeks since Detroit filed for bankruptcy, there has been a noticeable change. Palpable fiscal anxiety, in part driven by photos of decaying Detroit in newspapers and on newscasts, has found increasing expression in Chinese social media and on the editorial and commentary pages of the country’s leading news sites.

Underlying this discussion is the sense that China’s three decades of economic resurgence is being threatened by public officials who are unable or unwilling to learn from the mistakes of other countries, much less take responsibility for their own errors. Yet despite the very real warning that Detroit has sounded for China’s local governments, most commentators have been careful to note the different causes — and outcomes — of debt crises in both countries. “Because the two systems of government are different, Chinese officials will never have to take responsibility for a government bankruptcy,” noted JollyRoger398, an anonymous Sina Weibo user in Liaoning Province, on July 21.

The critiques don’t just target governing philosophy. As other users of Sina Weibo have pointed out, China’s local debts are largely held by state-owned institutions that don’t necessarily need to be paid back (unlike Detroit’s creditors). Taizhou Laomo, the Sina Weibo handle for the director of the Taizhou Media Group in Zhejiang Province, expressed the frustration of many when he tweeted on July 29: “Our local governments are like unlimited liability companies. No matter how much money is borrowed, nobody has to pay. The result is the issue is buried and more debt is issued, while nobody knows the real risk and how to deal with it.”

Similarly, Mao Xiaogang, a columnist with state-owned Beijing Daily, wrote a widely circulated column, “Detroit’s bankruptcy is a warning to us as well,” on July 26. He carefully noted that real-estate development — an activity widely associated with corrupt local-government officials who have access to land — has played a major role in China’s local-government-debt accumulation:

“Certainly, China’s local-government debt problem is different from America’s. For instance, Detroit’s debt was driven by the pressure of welfare burdens, pensions, medical care and unemployment benefits. But in China debt was incurred by trying to increase GDP via investment, infrastructure and the construction of hotels, offices and government buildings, while the social welfare benefits are secondary. Regardless of the different causes, both cases result in deficit spending and a mortgaged future. If the local-government debt bubble bursts, the consequences are unthinkable.”

Of course, not every Chinese newspaper and netizen views Detroit’s bankruptcy as an opportunity to highlight American virtue at the expense of Chinese corruption. On July 25, People’s Daily, the official mouthpiece of China’s Communist Party, editorialized that Detroit’s bankruptcy was an expression of American democracy’s failure. “When Detroit was in need of a helping hand on this critical issue, the Democratic Party and the Republican Party ignored the people’s well-being in favor of their respective interests and continued to quarrel while making excuses,” the paper wrote. The editors concluded: “It’s noteworthy that the United States is similar to Detroit in that it is struggling under a huge debt. The vicious cycle of living beyond one’s means seems to have become institutionalized. Detroit’s fall sounds the alarm.”

People’s Daily doesn’t lack for adherents to its ongoing narrative of the U.S.’s decline. But there is a surprisingly small number of similar commentaries in the Chinese news media and online. Rather, for weeks, Chinese netizens have devoted much of their commentary to salivating over Detroit’s cheap, spacious homes, especially as compared to the cramped, unaffordable abodes available to most Chinese.

And many Chinese — including newspaper commentators — have taken away a more practical lesson: Local Chinese economies need to diversify. “It is very dangerous to rely on a single industry and a single resource,” tweeted Lu Shangbin, a professor of journalism at Wuhan University. “‘Motor city,’ ‘coal city,’ ‘oil city,’ ‘copper city,’ ‘steel city’ may experience worse fates than Detroit’s if they don’t undergo some economic restructuring.”

The urgency for Chinese leaders to prevent their own Detroit appears to be real: On July 28, China’s National Audit Office issued a one-sentence statement noting that it was undertaking a national audit of government debt at the behest of China’s State Council (an organization roughly equivalent to a U.S. presidential Cabinet). Later that day, People’s Daily reported that the audit office would suspend its other work and begin the national audit on July 29. No word yet on whether they’ll release the results or the name of China’s Detroit, if and when they find it.

(Adam Minter, the Shanghai correspondent for the World View blog, is writing “Junkyard Planet,” a book on the global recycling industry. Follow him on Twitter.)

To contact the author of this article: Adam Minter at ShanghaiScrap@gmail.com.