In examining China, there’s little doubt now that the trendy thing to focus on is local governments and their debt.
Much credit is owed to Northwestern Professor Victor Shih who has been banging on this drum longer than anyone, and now stories about local governments (and how they’re not nearly as flush with cash as Beijing) are in the news it seems daily.
Earlier this week it was Andy Xie pointing out that more and more homeowners were buying places paid-for with relocation subsidies paid for by local governments.
Anyway, FT Alphaville points to an interesting China Daily report the gist of which goes basically: A local government applies for a loan claiming it will use the money for high-speed rail (!) it doesn’t. Instead it uses it to pay off debt.
Bear in mind, this happened in 2008. It’s just now coming to light. We’re not sure that matters a whole lot, since in general when you look at bubbles, you find that the cracks started appearing well before when you might have thought.
Anyway, as Shih has pointed out, local government (who are dependent on a property bubble for finances) may have debts totaling $1.6 trillion, which is a substantial portion of Beijing’s forex reserves. If/when they need a bailout, China’s big cushion could get hit hard and fast.
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