We covered this in February, but suddenly there’s a surge in interest in China’s public debt situation.Wha? Public debt in China? Don’t they have trillions and trillions of foreign exchange reserves?
Well, yes, but…
As Northwestern Professor Victor Shih has been arguing, city and state debt is substantial — so, substantial, in fact that a bailout of these regional governments could require a bailout that uses much of the country’s forex.
China’s hidden borrowing may push government debt to 96 per cent of gross domestic product next year, increasing the risk of a financial crisis in the world’s third-biggest economy, Professor Victor Shih said.
“The worst case is a pretty large-scale financial crisis around 2012,” said Shih, a political economist at Northwestern University in Evanston, Illinois, who spent months researching borrowing transactions by about 8,000 local-government entities. “The slowdown would last at least two years and maybe longer,” the author of the book “Factions and Finance in China” said in a phone interview March 1.
This story will probably stay way below the radar for a long time. It’ll be when the first local government needs a bail out that people will start paying attention to this time.
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