Have you noticed?
Chinese CDS spreads have been trending higher.
This chart is from CMA:
Suddenly, everyone is talking about government debt in China, something that wasn’t on anyone’s radar just a few months ago.
The debt isn’t Federal, it’s local, and a new report from Moody’s out today indicates that the size of local government debt may be understated by some $540 billion.
This comes several weeks after a big Reuters report about how Beijing was preparing for a mass bailout of its regional governments, which took on big debt during the downturn, and are dependent on real estate revenue to stay solvent.
Of course it’s complicated, as the local governments are all intermingled with banks and other debt-laden regional authorities. Just last week there was a story about a highway authority that announced it couldn’t pay its debt.
This topic, local government debt, is the subject of a new story in The Diplomat, which walks through some of the numbers:
Based on the figure released by the National Audit Office (NAO) at the end of June, local governments have accumulated debts totaling 10.7 trillion renminbi (RMB) or $1.65 trillion – about 27 per cent of China’s GDP in 2010. Because the NAO’s figure was based on a sampling of 6,500 local government-backed financial vehicles (out of more than 10,000 such vehicles nationwide), the actual magnitude of local government indebtedness is much greater. The People’s Bank of China, the central bank, recently estimated that local government debt totaled 14 trillion RMB (most of which was owed to banks), almost 30 per cent higher than the NAO figure.
Several interesting questions are raised by the revelation of local government debt in China. First and foremost, it has shown that public finance in China is in much worse shape than previously thought. On paper, China’s debt to GDP ratio is under 20 per cent, making Beijing a paragon of fiscal virtue compared with profligate Western governments. However, if we factor in various government obligations that are typically counted as public debt, the picture doesn’t look pretty for China. Once local government debts, costs of re-capitalising state-owned banks, bonds issued by state-owned banks, and railway bonds are included, China’s total debt amounts to 70 to 80 per cent of GDP, roughly the level of public debt in the United States and the United Kingdom. Since most of China’s debt has been borrowed in the last decade, China is on an unsustainable trajectory at the current rate of debt accumulation, particularly when economic growth slows down, as it’s expected to do in the coming decade.
Ultimately, it’s easy to see this coming down to mass bailouts from Beijing, which by all accounts is loaded with resources. Of course, bailouts are bailouts, meaning resources end up paying back unwise infrastructure investments, rather than going to where they’re needed.