China's Xi Jinping made a lot of grand promises March 28, pledging a new order where China and Chinese-led institutions such as the new Asian Infrastructure Investment Bank would promote prosperity across the region. But he was on shaky ground — literally. The Boao Forum where Xi spoke took place in Haikou, capital of China's island province of Hainan, whose local government, it seems, may not be able to pay its debt this year.
Much has been written about the $50 billion AIIB, which has won support from staunch U.S. allies Australia, South Korea and the United Kingdom, among others. Xi is clearly relishing what looks like a soft-power victory over the United States, gleefully touting China as a one-stop shop for "markets, growth, investment and cooperation opportunities." Before he starts writing checks, though, Xi should take a closer look at China's own books. Haikou is just one of many local governments grappling with a $4 trillion-plus debt pile. If Chinese leaders are going to achieve their growing international aspirations, they're going to have to be far more ambitious about getting their financial house in order first.
At 282 percent of GDP, according to the McKinsey Global Institute, China's total debt now exceeds America's 269 percent and Germany's 258 percent. Even more worrying: If the credit buildup continues at its current pace, that ratio will explode to 400 percent by 2018.