We wonder what will become of the dozens of Chinese ghost towns, which are literally unoccupied whole cities in China built for hundreds of thousands of occupants on loans such as those in the attached article. What will happen when these loans default? Throughout history, it has rarely turned out well after massive amounts of resources were allocated by central planners.
(H/T: Global Association of Risk Professionals (GARP) eNewsAlert).
China’s local governments amass debt
Tuesday, June 28, 2011
By David Pierson
Chinese local governments have taken on $1.65 trillion of debt with little regulatory oversight, an official audit found, raising concern about how much of the money will be paid back.
Some of the funds raised were improperly funneled into the stock market and the country’s overheated real estate sector, according to the first-of-its-kind review by China’s national audit office.
About half the debt, which was measured as of the end of last year, was incurred after Beijing in 2009 allowed banks to issue a record amount of new credit to stimulate the economy. Provincial, county and city level governments borrowed heavily to fend off the effects of the global financial crisis.
The total local-government debt is equal to about 27% of China’s annual gross domestic product. By comparison, there was an estimated $2.93 trillion of U.S. municipal bonds outstanding at the end of 2010, about 20% of the U.S. GDP last year.
Nearly half the debt was issued through thousands of local government investment companies whose borrowing would not show up on municipal balance sheets.
Beijing cracked down on the most troubled investment companies last year, ordering banks to stop issuing credit to them.
The huge obligations could pose a risk to China’s economy, which is bracing for a slowdown this year as it battles its highest inflation in nearly three years.
To pay off the loans, governments have relied increasingly on sales of local land to developers.
Some infrastructure projects such as highways and rail that received much of the borrowing’s proceeds won’t be profitable for years, increasing the likelihood that they could default on their loans.
“The ability of some [local governments] to repay the debt is low,” said Liu Jiayi, the country’s auditor general. “There are hidden risks.”
Chinese policymakers can avert a crisis if they move to allow the debt to be refinanced, said Qu Hongbin, co-head of Asian Economics Research for HSBC.
“Although the size is still manageable, Beijing needs to take immediate action to restructure these debts to mitigate defaulting risks,” Qu said.
About 37% of the total debt went toward infrastructure construction, 25% went to public transportation, 11% was used to buy land, and about 10% was spent on education, subsidized housing and healthcare, the audit said.
A lack of regulation allowed municipalities to lie about the value of their collateral and about their ability to pay off the debt and to steer the money borrowed to the property and stock markets, the auditors said.