A Discussion On Chinese Regional Debt: People Are Only Examining A Slice Of The Problem

Yesterday, I was on China Radio International talking about rising concerns over local government debt in China — how serious of a problem is it?  My fellow guest on the show was Professor He Ping, a colleague from Tsinghua University.  You can listen to the hour-long discussion by clicking here (select the first hour of the program).

One point that I think is very important, but only had the chance to mention once, and very briefly, during the program, is that despite all the attention they are getting, LGFV (Local Government Financing Vehicle) loans are only one of many categories of risky loans that have the potential to impose serious losses on China’s financial system.  In fact, in the early days of China’s stimulus-inspired lending boom, in Spring 2009, China’s bank regulators clearly considered loans to local government-sponsored infrastructure projects among the least risky loans taking place, arguing that it made little sense to set aside loan loss reserves against them since they were virtually certain to be paid back.  The fact that the least risky category of lending is now generating such concern is itself a reason for real concern.

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