2010-02-05

China's local governments may have debt problems

Banks made loans fast and furiously last year. Now they're trying to figure out where the money went, exactly. Scary View from China's Financing Platforms
Some 8,221 fund-raising platforms were operating at provincial, regional, county and municipal government levels as of June, according to CBRC. The bulk -- 4,907 -- were in counties.

These platforms were awarded a combined 8.8 trillion yuan in bank credit, while their outstanding loans grew to more than 5.56 trillion yuan – an amount nearly equal to the central government's debt.

Liabilities exceeded total fiscal revenues in 13 provinces. In some cases, liabilities were twice revenues.

And these figures may underplay the activity; some critics have questioned the quality of data used to describe the recent work of local fund-raising platforms.
"The scary thing is that the central government is not even clear on how many local fund-raising platforms there are, how big the risks are, and whether risks might be systematic," a high-level financial industry executive said.

Even central bank officials admit a lack of clear data. "All this needs to be researched," said a central bank researcher. "We've only begun to compile local numbers."
The loans went flying out the door to local governments and many of them were newly created platforms that didn't have experience in managing capital. No doubt there was some fraud and waste, but the main thing is that, like the U.S. government stimulus, a lot of the money was malinvested.

To service debt, local governments have been relying on cash flow from projects and land auctions. They also anticipate funds based on high-speed economic growth – expectations that some call too optimistic, and perhaps even dangerous given financial realities.

The central bank's Financial Office estimated that the local government debt service rate will exceed 15 percent by 2012. That means a downturn in land auction revenues or the real estate industry could trigger local debt crises.

In much of the world, the ratio of outstanding loans to fiscal year disposable income for a local government is 100 percent. But audits show debt for some Chinese local governments exceeds fiscal-year income up to five times, and that overall debt is increasing faster than financial resources.

"More than 70 percent of local financing platform projects are unprofitable," a source at a large commercial bank said.
There's a lot of focus on China, understandably. But this is a story all across the world. Local governments in the U.S. will be in the same situation vis-a-vis pensions and spending if the economy turns down. The world's central bankers fired all their bullets and if there's another wave, it will be epic.

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