Daily Lessons from Life 27 June 2011 - China cities owe US$1.65 trillion, some "may default"

"China cities owe US$1.65 trillion, some "may default" - AFP 27 June 2011

BEIJING - Chinese local governments held US$1.65 trillion in debt at the end of 2010, the state auditor said Monday, warning there was a risk some could default amid fears that bad loans will harm the economy.

Excessive borrowing by authorities to fund infrastructure and other projects has sparked concerns among China's leadership about the risks the loans pose to the financial stability of the world's second largest economy.

By the end of last year, local governments had taken 10.7 trillion yuan (US$1.65 trillion) in debts, the National Audit Office (NAO) said in a statement, or about 27 percent of China's 2010 GDP of 39.8 trillion yuan.

"The ability of some areas and industries to repay debt is weak and potentially risky," the NAO said.

The announcement represents the first time China has given an overall figure for local government debts, according to the state-run Xinhua news agency.

The state auditor said some local governments had to make new borrowings in order to pay back old loans, and some are depending heavily on revenue from land sales to meet their debt payments.

Auditors also found that 108.3 billion yuan of the total debts had been issued or used improperly, using methods such as providing fraudulent collateral or diverting the funds raised into capital or real estate markets.

Chinese banks last year loaned huge amounts to provincial financing vehicles -- intermediary agencies through which the governments take out borrowings because they are officially banned from assuming debt directly.

The credit was used to fund construction projects after Beijing called for nationwide efforts to spur the economy on the back of the global financial crisis.

The Asian nation has managed to power out of the crisis thanks to a stimulus package worth four trillion yuan and state-backed lending.

As a result, new loans nearly doubled to 9.6 trillion yuan in 2009. Last year, new lending fell to 7.95 trillion yuan but still exceeded the government's 12-month target.

The surge in credit has fuelled fears of inflation and bad loans, and the government is now moving aggressively to rein in lending activity.

It has hiked interest rates and increased the amount banks must keep in reserve over the past several months, as it tries keep a lid on consumer price rises and cool the economy amid concerns over overheating.

In May, however, the consumer price index in China rose 5.5 percent year on year -- way above the government full-year target of around four percent -- with many analysts expecting the rate to increase even further this month.

The NAO suggested that efforts should be made to "properly resolve" the current debt situation, based on a principle that says "the borrower must bear responsibility."

The provincial financing systems must be "cleaned up and regulated", it said."

Another night of keeping what the news agencies reported without any editing by me!

Lessons for me are:

1. there is this giant time bomb ticking away in the living room with loads of people KNOWING it is there BUT behaving as if it is NOT THERE!!;

2. another DEBT driven growth story just waiting to IMPLODE? Much like the credit crunch of the USA's housing loan and its derivatives? Is it good to have China's growth to cover the lack of growth from the USA? Or the world is just prolonging the agony or hope that when reality struck the risks and burdens have already been transferred or taken up by 'someone else', anyone as long as it is NOT ME!?;

3. my principle is very simple. IF it is NOT sustainable, it CANNOT be done!! Growth based on selling land is NOT sustainable as the consuming people will NOT have the money to buy high price properties as many as the greedy or 'optimistic' developers can build, using land from the local government!! WHY is it so difficult for ANYONE to say, with the child-like innocence that: the Empire has NO CLOTH!!?? Why ALL the learned and intelligent economists had NOT the gut and courage to say: this is unsustainable! This is slowly killing yourself but deluding yourself that taking cancer causing foods and drinks daily in small doses will NOT kill you eventually!!

May this time bomb be defused in time. Otherwise, another round of traumas and destruction of values and lives will, not if, happen. Sooner than anyone wanted. Maybe it is time to invest in tangible goods like farming? :-)