Chinese Local Debt
The below is an excerpt from a Credit Suisse report I was glossing over this morning. What I want to know: how can the world’s second largest economy not know if its local government debt is $1.4trn, $1.65 trn or $2.2trn? That’s an $800bln delta!
Chinese Local Government Debt Numbers in Focus
Monday’s report by the Chinese National Audit Office received plenty of attention in the markets today, with the CNAO reporting that at the end of 2010 Local Government debt had reached ? 10.72trb ($1.65trn), which is equivalent to 27% of GDP.
The number is quite different from earlier estimates made by other official Chinese sources, and again has the market calling into question the validity of some of these numbers. The WSJ noted that this is higher than the $1.4trn estimated by the CBRC and lower than the much higher $2.2trn estimated by the PBOC. Local analysts note that the variance is likely due to the fact that the PBOC data includes much more thorough numbers on the Local Government Financing Vehicles (LGFVs), suggesting that if the CNAO had taken into account the complete LGFV data set its numbers would have been significantly higher. One local Professor was widely quoted as estimating the real Local Government debt number at closer to ? 20trn, which is around 50% of GDP.
Interestingly the CNAO also reported that more than 15% of all new CNY loans that were issued in 2010 violated local regulations, either lacking regulatory approval, or were made with insufficient capital or improper documentation. The local press also noted that the first LGFV loan appears to have defaulted, with the Yunnan Highway Investment company telling the China Construction Bank in April that “effective from today’s onwards, we will only be paying interest on our loans, and will stop paying principals” The Business Insider web-site reports that in 2006 the LGFV borrowed ¥ 100bn from a consortium of banks (including two major names) for the purposes of building nearly 5,000km of highways in the Central-Western region of China.
Unsurprisingly the LGFV has been bailed out by the Yunnan government which is reported to have injected more capital to repay some of the bank loans, but which is clearly not a longer term solution. The servicing of the debt by the Yunnan government will allow the banks to record the loans as current, and it will avoid any large provisioning for losses at this time. The market however will have concerns that this is not the only problem of its type, and that the degree of overbuilding that has reportedly taken place is being revealed in the non-repayment of debts now coming due. This will also revive the debate over the misallocation of resources which has been so often claimed by China sceptics.