More On Debts In China, And Why You Should Ignore Dagong Rating Agency

It has been a consensus these days that it was Alan Greenspan, who in the early 2000s, kept easy monetary policy for too long, which encouraged lending, and subsequently, sub-prime lending, something that we are still living under the shadow of its consequences: over-leveraged and subsequent painful process of deleveraging.

It is, thus, preposterous, if one suggests today that there is no problem with debts in China. 

Below is the chart showing the M2 broad money supply annual growth rate since 2005.  As you can see, the money supply growth rate has surged sharply since late 2008 and early 2009, as the government responded to the Lehmanesque financial crisis by pumping in huge fiscal stimulus as well as allowing banks lending to go out of control.  Money supply growth has only been controlled only recently to a historical average level, which was still very fast.


Source: People’s Bank of China

If you believed that loose monetary policy in the early 2000s was the root cause of the financial crisis in 2007-2008, there is no reason to believe why there is no problems with China right now.

Of course, the numbers are not very transparent, so that no one should really have much confidence in any numbers whatsoever, and we can probably only treat the figures either as the ballpark figures or the lower limit.  Earlier, I mentioned the estimate earlier made by the People’s Bank of China in early June that there may be as much as RMB 14.4 trillion debts owed by the so-called local government financing vehicles (LGFVs). It is based on its statistics that total LGFVs’ debts are no higher than 30% of total banking lending, which is estimated to be RMB 47.9 trillion.

We then have a few more different estimates done by different government agencies, which produce some huge variations in figures. We had the China Banking Regulatory Commission’s (CBRC) estimate of RMB9.7 trillion, and subsequently the National Audit Office’s (NAO) estimate of RMB10.7 trillion of total debts, of which only RMB4.7 trillion are really associated with LGFVs.  These figures make the deviation among total debt estimates so huge that at the low end, the total local government debts only account for one-fourth of China’s GDP, and 50% at the high end.

And now, the People’s Bank of China comes out and deny that there are that much debts.  Sure enough, 30% upper limit applied to the whole country.  Granted, some provinces and others might not have used their credit up to the credit limit.  So RMB14.4 trillion is the upper limit.

But why does the People’s Bank of China not throw an exact number?  How can Chinese government really explain the widely different estimates by government agencies?  There actions of throwing up different numbers are hardly assuring.

And in my now on-going coverage of La forza del destino, the Italian debt crisis, I blasted the Chinese rating agency Dagong.  Today as Dagong threatened to downgrade Italy, Guan Jianzhong, the chairman of this insignificant organisation, spoke out and blasted Moody’s for saying that there is a hole in local government financing according to Wall Street Journal.  Guan responded to Moody’s allegation by saying that it was “unfounded with vicious intent,” which is pretty much what Chinese politicians would say in respond to criticisms from outside of the country.  He added that Dagong issued ratings for 1/3 of LGFVs, and believing that the governments will be able to repay.

Really?  Are you kidding me?

Have you heard that there are LGFVs already attempted to not repay their debts?  The one in Yunan and the one in Shanghai, have you ever heard that?  Have you not heard that one LGFV has been so desperate to get rid of the LGFV title because being a LGFV makes it difficult to borrow money?  Have you not heard that a local government debt auction has failed?

This article originally appeared here: More On Debts In China, And Why You Should Ignore Dagong Rating Agency
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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