Chinas wild, weird economy superficially
strong yet structurally brittle, propped up by cheap bank
lending and protected by relative financial isolation
anything seems possible.
Often, it is. In a
country so short on dependable data, where a secretive
governments decisions are rubber-stamped in private
before being casually issued to the world via friendly media
outlets, rumour and counter-rumour hold sway. Here, where
concealment of decisions, of opinion, even basic of
information is all, even the most speculative
scuttlebutt can feel feasible.
Take the issue of local
government financing vehicles (
LGFVs). These odd investment bodies are, or are set to
become, Chinas equivalent of mortgage-backed securities
or collateralized debt obligations.
to pump-prime its stalling economy in late 2008 resulted in
trillions of dollars being routed by state banks through
regional governments into LGFVs, which channelled that cash
into pet projects: golf courses, residential real estate, light
rail networks, freeways, shopping malls.
Too late, Beijing realized it had merely repeated its errors of
the 1980s and 1990s, when vast clods of cash were hurled at
ropey regional projects by state-run lenders, leading to the
huge bank bailouts of 1999 and 2004/05.
The 21st-century version
of these earlier financial clangers might prove no less
calamitous. Total outstanding bank lending to all LGFVs reached
$1.4 trillion by end-September, up 25% year on year, according
to the China Banking Regulatory Commission.
The banking regulator
warns that around 35% of these loans are insecure, or at high
risk of default. Most experts place the amount of LGFV loans
liable to go sour at between 30% and 40% of the total.
Early last month, Yang
Kaisheng, president of Industrial and Commercial Bank of China,
the countrys biggest lender by assets, put the local debt
figure at closer to Rmb10.75 trillion ($1.7 trillion), or just
shy of 30% of Chinese GDP. That figure boosts total government
debt at end-2011 to around $2.8 trillion, not far off the
countrys total hoard of foreign exchange reserves, at
Little wonder Beijing is
concerned, or that the authorities are weighing up every
possible solution to this growing crisis, however imaginative
or eccentric. One of the odder options floated in recent months
involves demanding that all local authorities and LGFVs provide
proof of their lending and spending since China unveiled its
$600 billion stimulus package in late 2008.
In other words
paper proof documenting every loan made, every parcel of
funding received, to determine whether money was used wisely or
poorly, and to discover how much cash slipped through the net,
winding up in the pockets of officials working with, or
connected to, LGFVs and favoured state firms.
Beijing started casting
around quietly for opinions around early December, people close
to the government say. "I sat in on a few meetings with [party]
officials where this was discussed," says a long-standing
foreign specialist who regularly advises the state council.
"There were compelling
reasons both ways. On the positive side, doing this would
create an effective financial census, giving the government a
powerful insight into how money was used and misused within the
system. On the downside, it was argued, this would prove very
hard to do. Local authorities wouldnt want their secrets
exposed. The sheer volume of paperwork would swamp
The argument went back
and forth for months, but by March it had been decided it was
best not to go ahead, the foreign specialist says, for two
reasons. "First, its a transition year, with the
leadership changing hands, and no one wants a big financial
scandal unrolling now," says the specialist. "And besides
this is China. Everyone will have taken a slice of the
action from the LGFV money, and you cant afford to make
everyone lose face."
With that unsavoury dish
now off the menu, China appears to be mulling over a hackneyed
alternative: forcing the market to pay for the states
mistakes. Or, put another way, forcing the capital markets to
again bail out the banking system.
This option, quietly
gaining momentum since February, would involve Beijing issuing
parcels of repackaged LGFV debt in the form of
municipal-commercial bonds which it would expect to get
snapped up by state-run banks, insurance companies and mutual
Around Rmb2 trillion in
LGFV debt comes due this year alone. James Kynge, author of China shakes
the world, believes that the bond markets could
"easily handle" that total, even if it included as much as
Rmb800 billion-worth of soured loans. It would also, Kynge
adds, help the government find a credible solution to its
"biggest red-button issue".
Others are not so sure.
China would need to keep repackaging its local debt each year
for at least the next five or six years, using the same old
ruse every time. The past has shown that the state is most
likely to flog its good debt first tranches containing
lower levels of likely non-performing loans to keep
institutional investors friendly.