China 'faces subprime credit bubble crisis' $1.7 Trillion

[jimmy olsen]

Not a good time for this.

http://www.telegraph.co.uk/finance/china-business/8770945/China-faces-subprime-credit-bubble-crisis.html

Monetary tightening in China threatens to pop the $1.7 trillion (£1.07 trillion) credit bubble in local government finance and expose the country's simmering "subprime" crisis, according to the Communist Party's economic guru.

By Ambrose Evans-Pritchard, in Dalian

7:00PM BST 17 Sep 2011

Cheng Siwei, head of Beijing's International Finance Forum and a former deputy speaker of the People's Congress, said interest rate rises and credit curbs to cool overheating were inflicting real pain on thousands of companies used by local party bosses to fund the construction boom.

"The tightening policy is creating a lot of difficulties for local governments trying to repay debt, and is causing defaults," he told a meeting at the World Economic Forum in Dalian. "Our version of subprime in the US is lending to local authorities and the government is taking this very seriously."

"Everybody assumes that they will be bailed out by the central government if they default, but I disagree with this. It means that the people will ultimately pay the bill for it all, at a cost to the broader welfare."

"Those who are not highly indebted are forced to help those who are," he said, echoing the debate over moral hazard that has divided opinion in the West since the banking rescues.

Local governments have created more than 6,000 arms-length companies to circumvent restrictions on bond issuance, creating a huge patronage machine for party bosses that has largely escaped central control.

The audit office said the loans have reached $1.7 trillion (£1 trillion). While some of the money has been used to finance much-needed investments in water systems and roads, a large part has fuelled unbridled construction with a dubious rate of return.

The local governments depend on land sales for 40pc of their revenue so the process has become incestuous and self-feeding. Such reliance on property sales revenues has greatly aggravated the post-bubble crisis in Ireland.

Mr Cheng said China is entering a "very tough period" as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice. "The inflation rate and the growth rate are conflicting with each other: it is very troubling," he said, describing what is known to economists as the Phillips Curve dilemma.

[Kleves]

It's always a good time for the PRC to have problems.

[The Minsky Moment]

It's not really a "subprime credit bubble," it is debt incurred in a prior stimulus operation.

Central government debt in China is usually reported at being just below 20% of GDP, which is obviously quite low.  Using the IMF figures for central government debt for 4Q2010 and 2010 nominal GDP, the number is 17.3%.

Now assume that the all the local government and "platform" obligations are simply assumed by the central government.  Also I will further assume that the real amount is about $0.5 trillion more than what is estimated by Cheng, in accordance with some of the more pessimistic third party estimates.  That would bring the total debt figure to 50-52%, which is quite a bit bigger, but still very managable.

Plus, under that scenario, total debt would be about $3.2 trillion.  But as of the end of June of this year, China's foreign exchange reserves (external assets) totalled  . . . $3.2 trillion.

The bigger concern therefore is the level of off-balance sheet financing being used to finance Chinese enterprises, which until very recently was a complete black box.  Earlier this year the PBOC for the first time published financial system data that permitted estimation of the extent of off-balance sheet financing, indicating that such financing accounted for about 1/3 of lending for 2010.   An analysis of the data by Credit Suisse estimated total system credit/GDP of 160%, as compared to 180% in the US just before the credit crisis.

[HVC]

It's always a good time for the PRC to have problems.

not when they're proping up the western worlds economy.

[HisMajestyBOB]

Not a good time for this.

No shit it's a bad time - I'll be over there in less than a month!

[Iormlund]

The local governments depend on land sales for 40pc of their revenue so the process has become incestuous and self-feeding. Such reliance on property sales revenues has greatly aggravated the post-bubble crisis in Ireland.

This was also the case in Spain.

[Jacob]

No shit it's a bad time - I'll be over there in less than a month!

Which part are you going to?

[HisMajestyBOB]

No shit it's a bad time - I'll be over there in less than a month!

Which part are you going to?

Shanghai.
Don't know which part yet.
I was there last year for a week to see the expo and the sights. Now I'll be teaching there for a year.

[Jacob]

Cool. Have a good time.

[HisMajestyBOB]

Thanks
Any advice?

[The Brain]

Work in the international settlement but live in the French concession.

[Jacob]

Thanks
Any advice?

For Shanghai? Not really I've only been there for a few days, so you probably have more insight than I do on the city. You can get some nice suits made there for a good price.

Is there anything in particular you're wondering about?

[HisMajestyBOB]

Not off the top of my head. China-general advice is fine too. IIRC you lived in China for a while? Or am I mistaken?

[MadImmortalMan]

If it pops, at least we'll have cheaper gas for a while.

[crazy canuck]

If it pops, at least we'll have cheaper gas for a while.

If it pops fewer people are going to be able to afford gas at any price.