July 12, 2011

JUST AS DIFFERENT AS JAPAN WAS:

China’s bad debts a cause for concern (Edward Chancellor, 7/11/11, Financial Times)

Credit booms are often followed by credit busts. For those who don’t read history, this lesson has been learnt from painful recent experience. But not as far as China is concerned. The world’s second largest economy has seen a tremendous surge in lending over the past few years. The inevitable bad loans are already turning up. Yet the markets are not unduly concerned. While other countries suffer the ill consequences of reckless lending, China’s fate is different. Or, so we are told. [...]

Problems are appearing with loans to local government infrastructure projects, which constitute the bulk of the recent credit surge. Last month, a heavily indebted toll road operator in the south-western province of Yunnan announced it could not meet its repayment schedule. A port operator in Shanghai was reported to have illegally diverted working capital loans into real estate investments. Beijing’s Land Reserve, a levered vehicle that is used to fund public land purchases, apparently faces liquidity problems.

Nobody knows for sure how much debt these local government funding vehicles have taken on. The highest reported figure of Rmb14,000bn ($2,165bn) exceeds one-third of China’s GDP. Nobody knows how many of these loans will default. Moody’s has warned they may drive the banks’ non-performing loan ratio to 12 per cent. In any other country, this would be a cause for concern. But not in China.


Posted by at July 12, 2011 6:21 AM
  

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