Monthly Archives: December 2013

RED ZONE: China’s local-government debt

December 31, 2024 by Paul Maidment in Asia-Pacific.

China’s local-government debt bomb is a curious piece of financial ordinance. Whether it explodes or is defused may end up costing Beijing much the same. A newly published audit by the country’s state auditor puts China’s debt-to-GDP ratio at 58%. By international standards that is a modest number and no where near the red zone where a country’s sovereign indebtedness starts to become detrimental to growth. A debt implosion along the lines of a Greece or Cyprus is widely regarded as being highly unlikely. Yet China’s authorities see this as one of the biggest risks to their country’s economy in the medium term and have put addressing it high on their list of economic policy priorities. The cause for concern is that three-fifths of it is local-government debt. The state auditor says local governments’ outstanding debt at the end of June 2013 was 17.9 trillion yuan ($2.95 trillion), including contingent liabilities and debt guarantees. Some private estimates put the number as high as 25 trillion yuan. But even the official figure is still two-thirds higher than it was at end-2010, the previous time the state auditor tallied the numbers, and the first time it made the figures public. Much of this debt was taken on by provincial and municipal governments in the wake of the 2008 global financial crisis to fund infrastructure projects, frequently through captive commercial investment companies used to get around the rudimentary system Beijing has for allocating tax revenues to provinces and cities for spending. Many of these investments aren’t generating sufficient returns to pay operating and interest costs or to repay the loans taken on. The U.S. rating agency Moody’s said earlier this year that 53% of all municipal construction companies needed to restructure their loans. That, in turn, points to a potential rise in non-performing bank loans, especially at smaller (and weaker) regional and local banks, or the risk of local governments left holding the can — which in a country as state-centric as China would mean the can ultimately ending up in Beijing. Ever since the initial audit, central government has been containing new borrowing by local authorities, getting state-owned banks to impose tighter lending standards and starting to expand municipal bond issuance as an alternative to land sales as a source of local government revenue. At the same time it has been writing off the worst of the loans that have gone sour and getting banks to reschedule others in order to avoid any embarrassing failures. At the same time, there will be a hurrying up of fiscal reform, which will reform governance as well as their finances. This will eliminate extra-budgetary funds, bringing all government revenues on budget, and expose many more provincial and municipal officials to the discipline of the marketplace as the municipal-bond market expands. That will not prove particularly comfortable for local officials used, as the Chinese proverb holds, to the mountains being high and the emperor far away. It will also make the dipping of local hands into the honeypot of public money more difficult.

The rapid increase in the debt of China’s provinces and municipalities will fast forward much needed reform of local government’s finances and governance.

The trouble with forward guidance

December 28, 2024 by Reuters Comment in U.S..

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If a gap opens between a central bank’s promises and the market’s belief, the cost will be levied in the usual way with financial markets — volatility.

POWER PLAYER: Roberto Azevêdo

December 27, 2024 by Alex Erquicia in Global Economy.

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Director-General Azevedo turns emotional and is comforted by Chairman Wirjawan during the WTO closing ceremony in Nusa Dua

The WTO’s new director-general has made the multilateral agency a player in the global economy again — and himself with it.

POWER PLAYER: Wolfgang Schaeuble

December 26, 2024 by Paul Maidment in Europe.

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One of the oldest and most experienced European politicians, Schaeuble is also one of the the most hated. But to German Chancellor Angela Merkel, he is a trusted rock of stability.

RED ZONE: China’s economic reforms

December 25, 2024 by Paul Maidment in Asia-Pacific.

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2014 is the year when China has to start picking up momentum of structural reform if it is to clear the “middle income trap” and become a rich country.

RED ZONE: Income inequality

December 24, 2024 by Alex Erquicia in Global Economy.

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The gap between the rich and the poor is likely to take a bigger space on the political stage in 2014.

As sea ice shrinks, Arctic shipping options expand

December 22, 2024 by Earth Policy Institute in Global Economy.

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Jump in maritime traffic across the roof of the world only made possible by a dramatic shrinkage of ice coverage.

Would-be U.S. oil exporters face tough politics

December 21, 2024 by Reuters Comment in U.S..

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U.S. President Barack Obama has little reason to favor U.S. oil producers, who opposed his reelection, by removing an export ban whose principal effect is to transfer revenues from domestic oil producers to U.S. refiners.

Investors start to believe Fed that tapering isn’t tightening

December 18, 2024 by Paul Maidment in U.S..

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U.S.Federal Reserve Chairman Bernanke addresses news conference following the Fed's two-day policy meeting at the Federal Reserve in Washington

U.S. Fed Chair Ben Bernanke finally gets investors to shift focus from the timing of the tapering of the central bank’s stimulus to its intention to keep monetary policy accommodative for a long time.