Tuesday, June 28, 2011

China's Local Government Financing

On a day when markets seek for a Greek relief rally, as the Greek default may appear like mission impossible and the real challenge for Greeks now to get into such mess, I am looking at "perceived hope" of growth in China, while the financing of that growth becomes more riskier. The economists at Societe Generale are offering their views on China's local government financing issues today. I skip here the consensus optimism, but look at potential problems, as per economists at Societe Generale:

...China’s local government debt problem is scary in different ways. A simple calculation based on the information available in the report suggests that the total debt load increased 36 times in nominal terms and fivefold relative to GDP between 1997 and 2010! More than 80% of the money has gone to finance hard infrastructure. Economically speaking, an increasingly bigger share of total capital has been allocated to the public sector, and the marginal return of each borrowed yuan has been on a steady decline. In the last three years, total liabilities of local governments nearly doubled in size and ballooned from 17% to 27% of GDP. The health of China’s public debt and investments is deteriorating at its fastest pace ever.

Click on charts to enlarge, courtesy of Societe Generale.

Now, if one assumes that investments are "hard infrastructure" and often (about one quarter) of "debt is promised with land sales revenues", the maturity profile may provide some challenges as loans are maturing.

But then again, quoting the economists at Societe Generale:

... we can say China is different as there is no clear trigger of a sudden emergence of bad debt. Both debtors and creditors belong to the government, more or less.

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