“Two ratios in the Maastricht Treaty, namely the government debt-to-GDP ratio of 60 percent and deficit-to-GDP ratio of 3 percent, have been used globally to determine the safety of government debt,” said Jia Kang, head of the research institute for fiscal science at China’s Ministry of Finance. Government debt is considered to be at a safe level if it is below the two internationally recognized “warning lines” or at a dangerous level if it exceeds the warning lines.

Jia said that China’s government debt-to-GDP ratio and deficit-to-GDP ratio are both relatively low according to the warning lines in the Maastricht Treaty, officially known as the Treaty on European Union. The country’s local government debts amounted to 10.7 trillion yuan at the end of 2010, accounting for about 27 percent of its gross domestic product (GDP). As its public sector debt as a percentage of GDP reached about 20 percent in nominal terms, China’s total government debt would amount to only around 50 percent of GDP, and be well within the safety zone, even if bonds issued by policy financial institutions were taken into account.

China has implemented a proactive fiscal policy in recent years, but its deficit-to-GDP ratio has never exceeded 3 percent. The ratio was slightly below 3 percent in 2009 and 2010, and dropped below 2 percent in 2011. As the country cut its 2012 budget deficit by 50 billion yuan, the ratio is expected to drop to around 1.5 percent this year, far below the 3 percent international warning line.

Under the Maastricht Treaty, every E.U. member state must bring its deficit-to-GDP ratio under 3 percent and debt-to-GDP ratio under 60 percent. However, the treaty did not work as well as expected. Almost all E.U. member states plagued by sovereign debt problems have amassed huge debts far exceeding the warning lines. The Greek debt crisis broke out when the country had a deficit-to-GDP ratio of more than 10 percent and a public sector debt-to-GDP ratio of around 125 percent.

The debt risk of local governments is controllable

China’s government debts have not only a healthy index but also strong debt paying ability and so the scale and risk of debts is controllable, said Bai Jingming, deputy director of the Research Institute for Fiscal Science of the Ministry of Finance of China.

Bai said that some advanced countries did not yet wipe off the old debts but the newly increased debts have arrived. The level of debts is rising. The data show that the overall deficit in 27 European Union countries accounts for 4.5 percent of their GDP in 2011, a down from 6.5 percent in 2010, but is still higher than 3 percent, the critical value. Although the deficit rate in the European Union countries is somewhat decreased, the overall debts are still high, accounting for 80 percent of the GDP in 2011 and 82 percent in 2012, which is far beyond 60 percent, the limit value.

Besides the European Union, the debt situation in other advanced countries including Japan and the United States is equally bleak. Someone had forecasted that the Japan’s national debts to its GDP ratio will climb to 239 percent by the end of 2012.

However, the situation in China is completely different and both its debts rate and deficit rate showed a downward trend. The total scale of local government debts of China is about 11 trillion yuan in 2010 and the newly increased debts only reach 300 million yuan in 2011. The GDP of China increased by about 9 percent in 2011 while the local government debts basically remain unchanged compared with the last year, which means that the proportion of local government debts to the GDP actually declined to nearly 23 percent from 27 percent in 2010.

“The debt risk, in the final analysis, involves whether the debts can be repaid timely and the debt paying ability of the governments depends on the financial revenue, namely issuing new debts to repay old debts, which also needs support from the increment of the government revenue,” said Bai.

According to Bai, China’s public financial solvency is strong and its debts are controllable, which mainly thanks to the following three factors:

Firstly, the stable and rapid growth of Chinese economy guaranteed the rapid growth of fiscal revenue and provided strong support for the financial resources of the state.

Secondly, using proper and proactive fiscal policies including tax reduction measure to stimulate investment and consumption and drive economic development forward, rather than the pure expansion of deficit to stimulate economic growth. Similarly, it not only lifted the worries of the public but also stimulated investment and consumption to pay close attention to the field of people’s livelihood and improve the level of social security and public service.

Thirdly, it is because of the strengthened management of financial expenditure. In recent years, China constantly deepens its management of financial expenditure and strengthens the public budgets, which effectively constrained unreasonable expenditure and laid the institutional foundation for the prevention of the risk of government debts.

There is not a real basis for the rumor of “outbreak of risk in a large scale.”

Someone said that among the 11 trillion yuan of local government debts, the expired debts will reach 17 percent, 11 percent and 9 percent respectively in 2012, 2013 and 2014, with the first debt paying peak arriving in 2012. In the case of the stringent regulation of the real estate and slowdown of economic growth rate, the local financial revenue from the land began shrunk and the debt paying ability will face greater pressure, which may lead to the debt crisis.

Bai said that the above statement that “the first debt paying peak will arrive in 2012″ is not exact. In terms of the debt repayment period, 25 percent of debts need to be repaid in 2011, which is much higher than the 17 percent in 2012. The local governments have repaid over 2 trillion yuan in 2011 and newly increased debts are only 300 million yuan. Therefore, it can be said quite stable and smooth. Even if the fiscal revenue slows down in 2012, the expired debts reduced by nearly one third and it is unlikely to trigger the so-called “debt crisis.” After 2013, the expired debts will reduce to about 10 percent and the debt risk will also continue to reduce.

Jia Kang said that China has taken various measures and firewalls to prevent from and eliminate the potential risk of local debts, including strengthening the state’s financial strength and increasing the capital available for local governments and the cashable assets. For example, as a large amount of debts are got from the construction of key infrastructure, which can produce cash and earnings. The debts can be repaid through the earnings. Some other debts can be repaid through such ways as assets disposal, project transfer and right offerings.

It is sensational speculation and has not real basis about some foreign media’s hyping that the Chinese government debts will outbreak collectively, Jia said.