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Where China Hides Its Debt
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Local investment companies were allowed to borrow beyond their limits after the financial crisis of 2008. There are about 8000 local investment companies (LIC's) and they were used during 2008-2010 to get funds quickly to projects. The LIC's borrowed for local governments, and borrowed extensively to build roads, railroads, power plants, and other infrastructure and buildings. Northwestern University Professor Shih has followed this carefully, and estimates LIC debt owed to banks at $1.68 trillion, or 34% of China's GDP. Some of the banks have collateral in land, but many banks are relying on the ability of the local governments to pay back the loans. And some of this is in money losing projects.
China's banking system in 2010-2015
01/12/2010
The effects of the stimulus spending binge and speculative behaviours of local governments and state owned companies, on the loans made by state owned banks.
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China's local government debt is estimated to be in the range of 27% to 42% of GDP. Loans by banks to local government financing vehicles face high risk of default.
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China's efforts to revive its economy with a large Stimulus Spending Plan.
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China's Debt crisis
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The debt of local governments estimated at between 27% of GDP by Dragonomics and the China's National Audit Office, to a much larger 42% by Prof. Shih of Northwestern University.
Grouped Articles
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Charlene Chu Is the 'Rock Star' of Chinese Debt Analysis
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Large exposure to local government financing vehicles of China's smaller banks
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Larger banks have a smaller portion of their loans made to local government financing vehicles than the larger banks. Agricultural Bank of China, Construction Bank of China, Bank of China, Industrial and Commerical Bank of China have 6-7% of their loans made to local government financing vehicles, compared to 20% for Everbright Bank and 13-20% for other smaller banks. This means they will be the first to be in trouble in a financial crisis because of the high risk and poor asset quality of such loans.
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Chinese Banks' Divided Capital
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Chinese Bank Regulator Warns of Loan Risks
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2010 high Inflation and asset price bubbles in in India and China, and low or no inflation in Europe, Japan and the USA.
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Wide divergence in conditions and the prospects of tightening credit in Asia affecting export prospects of the USA which depends on exports for half the growth generated in 2009 and early 2010 according to Commerce Department figures.
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China's looming asset price bubble in late 2009.
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The role of the yuan pegged to the dollar in all this. The need for action to let the currency appreciate now rather than later.
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Growing Risks for the Chinese Economy going into 2010-2014
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Fear Pervades China's Stocks As Market's Gains Disappear
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Europeâs Debt Crisis Is Casting a Shadow Over China
New York Times 05/17/2010
The threat posed by China's local government debt to China's banking and financial system
07/29/2010
Because of the opaqueness of the financial system the estimates of the local government debt varies from 27% to 42% of GDP. Prof Shih of Northwestern University, an expert on this subject, now estimates this to be $2.6 trillion or 42% of GDP. Other estimates from the National Audit Office put this at 27% and from China's central bank put this at 30%. Prof Shih's earlier estimate was 34%. Because of the large number of local government entities and the lack of transparency the figures may actually turn out to be higher as China's regulators and other analysts improve their estimates. The 42% estimate is $2.6 trillion in local government debt. China's large foreign exchange reserves of $3 trillion and low interest rates will give China some space for addressing the problem with another round of injection of capital into the banking system.
Linked Articles
Wall Street Journal 06/28/2011
BusinessWeek 07/29/2010
Local governments and state-owned companies are fueling a real estate bubble in China in 2009-2010.
07/29/2010
Northwestern University Prof. Shih estimates that state banks in China hold $1.68 trillion in debt of local investment companies which invest for local governments. In many cases the banks have little collateral. The central government in China aggressively supported this lending to quickly get money to projects in the aftermath of the 2008 financial crisis, but this may have backfired with money going into speculation and building a bubble.
Linked Articles
Chinaâs Real Estate Boom and Conflicting Policy
New York Times 08/01/2010
BusinessWeek 07/29/2010
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