(p. C14) There is no such thing as a free stimulus.
At first sight, China’s response to the financial crisis looked cheap. A fiscal deficit totaling 3.1% of gross domestic product in 2009 and 2.6% in 2010 compares with 12.7% and 10.6% in the U.S. The reality is that it was considerably more expensive than that.
China’s response to the crisis came primarily from bank loans rather than central government debt. With many of those loans now threatening to turn bad, the cost may still end up on the government’s balance sheet.
The heart of the problem is debt taken on by local government financing vehicles in the course of two years of huge infrastructure investment. These are entities created and backed by local governments to get around legal constraints on their borrowing. No one knows how much debt they have.