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Xi Faces Test Over China's Local Debt
Keywords:
China's domestic debt has surged to levels that precede a crisis, to 216% of GDP and heading for 271% by 2017 according to Fitch Ratings. As a result president Jinping has taken over control of economic policy and controlling debt, especially local government debt, is now a top priority for 2014. Jinping will head the "leading group" for overall top down reforms, reflecting the new urgency. Local government debt went up 67% from 10.7 trillion yuan to 17.9 trillion yuan ($2.95 trillion) in just 3 years from 2010 to 2013, according to the National Audit Office. About half of this debt is due by the end of 2014, according to Standard Chartered Bank economist Stephen Green. Another risk is that shadow banking with interest rates of 10% are now about 11% of new lending. The option adopted by the government to use central government funds and regulation to restrict lending could make local governments turn increasingly to the shadow bank lenders (trust companies, and informal lenders) making things worse. The other option of tackling it aggressively by letting some companies default has the risk of other lenders raising rates on loans and bonds. This makes solutions tricky and prone to problems of increasing severity.
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China's local government debt poses a risk for the economy
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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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Even after the efforts to restrain lending in 2010 in China following heightened stimulus lending in 2009, the level of bank lending has exceeded 10.5 trillion yuan and is at the same level as 2009. This includes the lending through trusts and other mechanisms according to Fitch Ratings. This explains the inflationary pressures and property bubble.
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China's banking system in 2010-2015
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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.
Grouped Articles
Asia Goes on a Debt Binge as Much of World Sobers Up
Wall Street Journal 05/24/2013
China's 'Shadow Banks' Fan Debt-Bubble Fears
Wall Street Journal 06/24/2013
China's Silver Linings Playbook
Wall Street Journal 06/24/2013
Wall Street Journal 06/25/2013
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