China's sovereign debt: A balance-sheet perspective

•We construct balance sheets for China's government and public sector.•China's public debt-GDP ratio is lower than in most large economies.•China's government and public debt-asset ratio is lower than its historical height.•Local government debt risk is enlarged by fiscal and financing double mismatch.•China's public debt risk is manageable.

We analyze China's sovereign debt by constructing balance sheets for China's government and public sector. We find that China's government debt-to-GDP ratio is lower than that of most large developed economies. We also find the debt-to-asset ratio of China's government and public sector significantly lower than its own historical height (1998-2002). Local government debt is mainly to finance infrastructure investments. Local government debt risk is amplified by two mismatches. The first is the income-expenditure mismatch between central and local governments. The second is the maturity mismatch of short-term debt and long-term infrastructure investments. The maturity mismatch may cause short-term repayment difficulties.