Will China Need a New Debt Ceiling Too?

(Polka Dot)

I don’t know enough about the Chinese economy — or the U.S. economy, for that matter — to say just how big a deal this is, but I sense it’s potentially pretty big:

China said local governments owe debt equal to more than a fourth of the country’s economic output, the first time Beijing has put a number on such debt, fueling fears banks could again face mountains of bad loans and underlining the limits Beijing faces as it battles inflation.

The National Audit Office said Monday that local-government debts total some 10.7 trillion yuan ($1.65 trillion), or 27% of China’s gross domestic product last year. The report Monday was billed as a comprehensive tally of such debt, much of which was incurred during a two-year stimulus-spending binge ordered by Beijing to fight the effects of the global recession.

Some analysts say the National Audit Office’s figure failed to count certain kinds of local government debt, meaning the actual total could be even higher.

Either way, the figure released Monday affirms analysts’ belief that the true level of China’s government debt is considerably higher than has been acknowledged by the Finance Ministry, which puts just the central government’s debt at 17% of GDP without taking into account local governments’ debt.

And, just to put things in perspective:

Direct comparisons to public debt elsewhere, such as the U.S., are difficult. Gross public debt in the U.S. was 91% of GDP in 2010, according to the International Monetary Fund. That includes debt owed by one arm of the government to another, such as Social Security, but doesn’t include exposure to debt owed by Fannie Mae and Freddie Mac, the mortgage companies the U.S. has nationalized, nor state and local debt.

That’s from a Wall Street Journal article by Tom Orlik, interesting throughout.

Also interesting is a Journal op-ed by Andrew Collier, former president of the Bank of China International’s U.S. office, headlined “How China’s Banks Break the Rules”:

One property developer in Fujian Province explained his method for raising capital. To build a nearly two billion yuan ($308 million) building, he has raised one billion yuan through pre-sales of apartments, but he is still short about 800 million yuan to complete construction. Banks won’t lend to this sector owing to recent Beijing efforts to cool the property market. Instead, the developer is looking for an innovative source of capital: pledges of future personal mortgage loans as collateral, a collateral that doesn’t yet exist. Although this type of financing is unusual and the details aren’t completely clear, the developer requires future residential buyers to purchase their mortgages through the bank that provides the developer a loan.

Might be a good time to learn how to say “bubble” in Mandarin? Or at least “hard landing“?


Joshua Northey

China has been over-investing in some types of infrastructure for quite a while. So much capital is flowing in that it doesn't matter much, but even a robust economy can only support so much mal-investment. Beijing needs to spend some time really making sure the next round of large investments go to things that have a real clear economic value/benefit.

commonsenseless

Debt Ceilings dont work! Just look at Greece and the Stability Growth Pact (EU's version of debt limit). All they lead to is clever accounting gimmicks (Goldman helpedd greece out by using complex financial language to hide the debt).

The best and the only way for a country to stay out of debt is by abolishing (No, I'm not Ron Paul disguising as a troll) the the biggest lender which is the Central Bank.

They hold most of the debt in almost all nations! You cut the free money and you cut the size of the gov't. Its that simple.

"money is the blood of the government"

Laowaiblog

True. China's banks owe a lot of money. However there's no reason to be quick to judge that the loans will be bad or that they will default. There are many ways to raise money, if needed, and although the fears might be justified, they may be premature.

http://laowaiblog.com