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.

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.

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.

Volcker rule’s devil lies in the details

December 10, 2024 by Paul Maidment in U.S..

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A Wall Street sign outside the New York Stock Exchange.

The approval of the final version of the Volcker rule, a restriction on banks’ proprietary trading, is being billed as the toughest piece of U.S. financial-markets regulation to come out of the aftermath of the 2008 global financial crisis.

Battle of the brands in Brazil

December 10, 2024 by Paul Maidment in Americas.

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Soccer’s two top footwear and apparel brands, Adidas and Nike, will be kicking lumps out of each other at the FIFA 2014 World Cup in the fight for bragging rights in the global $20-billion-a-year sporting goods market.

Acquisitive Carlsberg savors its China options

December 5, 2024 by Paul Maidment in Asia-Pacific.

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The Danish brewer has taken control of Chongqing Brewery, the largest takeover of a Chinese brewer by a western one to date, but this could be just a first step to bigger ambitions.

The commercial drone finds its proven visionary

December 2, 2024 by Paul Maidment in U.S..

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Amazon CEO Jeff Bezos’ embrace of commercial drones is a boost for an industry facing privacy, safety, and most of all regulatory challenges to a technology that could transform industries.

Global manufacturing activity in November in one chart

December 2, 2024 by Paul Maidment in Global Economy.

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Purchasing Managers Indices from around the world point to a strengthening of the world economy.

Caps not in fashion among London’s high-earning bankers

December 2, 2024 by Paul Maidment in Europe.

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The latest report on European bankers’ pay suggests little hope that the E.U.’s proposed caps on bonuses will prove effective in reining in risk taking. Aligning remuneration with long-term performance would be more fruitful.

Posts By: Paul Maidment