China orders banks to keep lending to insolvent state projects

Thrugelmir

China has ordered its banks to prop up insolvent provincial government projects, in the latest effort to support rapidly cooling growth and put off dealing with the mountain of debt that has built up in the past six years.

Authorities told financial institutions to keep lending to local government projects even if the borrowers are unable to make principal or interest payments on existing loans.

The directive, issued jointly by the finance ministry, banking regulator and central bank, highlights the challenges facing China as it struggles to deal with the massive volume of debt left in the wake of its post-crisis stimulus, amid a sharply slowing economy.
The “suggestions on properly handling the issue of follow-up financing for existing projects undertaken by local government financing vehicles” was published on Friday by China’s cabinet, the State Council.
It explicitly banned financial institutions from cutting off or delaying funding to any local government project started before the end of last year and said any projects that are unable to repay existing loans should have their debt renegotiated and extended.
Analysts said the move amounted to an official policy of “extending and pretending” that an estimated Rmb22tn ($3.54tn) of questionable local government debt would eventually all be repaid.
“Much of the local government debt in China probably has a solvency problem but Beijing would like to pretend they have a liquidity problem instead and they want banks to keep lending in the vain hope that the borrowers will be able to repay one day,” said Chen Long, China economist at Gavekal Dragonomics in Beijing.
“This is a bit like the situation in Greece — the EU keeps lending to Greece in the hopes that one day the economy will recover and this debt will be repaid.”
In the aftermath of the global financial crisis China launched an enormous stimulus programme described by economists at the time as the biggest fiscal and monetary easing in history.
The bulk of the stimulus was in the form of credit from state banks, which funnelled loans to off-balance sheet subsidiaries of local authorities known as “local government financing vehicles”.
With Beijing’s approval, these entities allowed them to evade rules that technically barred local governments from running deficits and helped them launch countless infrastructure and real estate projects to kick-start growth.
The subsequent construction boom helped the Chinese economy rebound rapidly and also boosted growth in commodity exporters like Brazil and Australia but it also pushed debt up from about 130 per cent of GDP to more than 250 per cent today.
Analysts point out that almost every economy in history that has seen a debt build-up that rapid has experienced a financial or growth crisis.
After years of virtually ignoring the problem, the government has started to explicitly recognise much of the debt, most notably with the launch of a debt-for-municipal-bond programme.
The directive issued on Friday also said that if existing projects could not be finished with the loans they already have then they should look first to private sector investors and then to local governments, who are required to raise the money by selling bonds.
In recent months, Beijing has rolled out a plan for local governments to pay back Rmb1tn in LGFV debt by issuing municipal bonds instead.
But the latest available public figures on local debt, published by the National Audit Office in mid-2013, show that of the Rmb17.9tn of debt outstanding at that time, Rmb2.8tn will mature this year alone.
That means the directive issued Friday could lead to the rollover of as much as Rmb1.8tn of debt not covered in the bond swap programme.
Many analysts have compared Beijing’s approach with the way Japan handled its own debt crisis in the 1990s. Tokyo refused to allow mass defaults, pushed down interest rates and rolled over existing debt with a policy that led to two decades of stagnant growth.

http://www.ft.com/cms/s/0/3ec5fea4-faef-11e4-84f3-00144feab7de.html#axzz3aF9itUXx

Generali

I do fear that there's a risk that this ends up blown out of proportion.

UK total debts total about 500% of GDP, half the level of China.

cells

china may be adding a lot of debt to the system but it is backed up by a lot of assets too

For instance they are building in the region of 10 million new homes per year. If you secure a $50k mortgage on each one of those homes that equals $500 Billion debt but the assets more than cover it

If you include all the other buildings and infrastructure being built it seems very reasonable that china could add a trillion + dollars a year in debt and be just fine

stator

cells wrote: »

china may be adding a lot of debt to the system but it is backed up by a lot of assets too

For instance they are building in the region of 10 million new homes per year. If you secure a $50k mortgage on each one of those homes that equals $500 Billion debt but the assets more than cover it

If you include all the other buildings and infrastructure being built it seems very reasonable that china could add a trillion + dollars a year in debt and be just fine

Property is an asset but the value can fluctuate wildly. If the economy tanks and people stop flocking from the country the new flats could be worthless.

cells

stator wrote: »

Property is an asset but the value can fluctuate wildly. If the economy tanks and people stop flocking from the country the new flats could be worthless.

property prices cant really fluctuate "widely" and when they do its far more often up than down.

anyway we know from developed countries that housing tends to fall towards the 2 persons per property density.

That means if china has 1,400 million people she will need 700 million homes in the future. China does not have anywhere close to 700 million homes so there can not really be an oversupply.*

There can be price movements up and down but no fundamental overproduction until at least 600 million homes are built.


with regards to china stopping its development and hence homes becoming "worthless", i think its now impossible for china not to become a first world nation which means a level of first world infrastructure




* interestingly if we use the 700 million homes figure and put a mortgage of $100k on each one and say two thirds of homes have a mortgage the rest dont. You get a figure of ~$50 trillion in just mortgage debt for homes. double up again for other infrastructure and you are at $100 Trillion debt. what seems a stupid unrealistic crazy debt of $100 trillion, becomes quite normal when you consider the scale of china