Debt Bubble, China Style

Has China reached the limits of debt-financed growth...?

A RIFT may be growing between local government leaders in China and the central planners in Beijing. The local leaders have been gunning the growth engine – while the central planners and bankers are worried about socially destabilizing inflation, writes Dan Denning in his Daily Reckoning Australia.

The China Daily reports that, "Yuan Shuhong, deputy director of the Legislative Affairs Office under the State Council, said local leaders should receive deductions in their job evaluation, if local debts exceed a certain limit." Yuan said the accumulation of too much local debt could lead to a negative appraisal by Beijing.

So Beijing is sending in the lawyers to restrain credit growth. This should be interesting. What's even more telling is that the crackdown on local government borrowing is, "part of efforts to change from a GDP-oriented model of growth to a sustainable and environmentally friendly one."

Has China's economy reached the limit of debt-financed growth? It'll be worth following up on. Local government debts of $1.65 trillion amount to nearly 25% of Chinese GDP. The ratings agency Moody's has said the actual level of local government debt may be half a trillion Dollars larger than China's national auditor reported.

Moody's analyst Yvonne Zhang said in a note: "Banks' exposure to local government borrowers is greater than we anticipated." Zhang called for a "clear master plan" to solve the problem. She warned that without a plan, the ratings outlook for Chinese banks could turn negative.

Ah yes, the master plan! The master plan is probably going to involve a restructuring of the debt. Hmm. That sounds familiar. China's stimulus tab is coming due. It's also possible that the central government could spend some of its huge foreign exchange reserves to recapitalize banks after they take losses.

But it shows you that all the world's problems are from the same genus: rapid credit expansion. The species are different depending on the location. In Australia, it's household debt. In Europe, it's government debt. In America, it's both. And in China, it's local government debt to build fixed assets. 

Same problem. Different instances.

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