If you line up China’s recently counted 17.9 trillion yuan ($2.95 trillion) in debt with 100RMB notes (15.5cm*7.7cm) it would form a line that stretches 1.4 million kilometers (856,000 miles) long. That is the debt guaranteed by local governments. On December 30th, 2013, China’s National Audit Office (NAO) announced this amount, claiming the governments owed 10.9 trillion yuan ($1.8 trillion), with an added 2.7 trillion yuan in explicit debt and 4.3 trillion yuan in implicit debt, leading to the final figure of 17.9 trillion yuan, or about a third of China’s GDP.
The debt and the land
Over the past three decades, China has often achieved double-digit annual economic growth, so where did all these debts come from? Based on a report from The Wall Street Journal, the high economic growth, to a large extent, depended on local government expenditures on construction projects. But, in 2008, such construction became heavily reliant on loans.
According to the official reporting from NAO, China’s local government debt has a close connection with land. By the end of 2012, 11 provinces, 316 municipal cities and 1,396 townships had a commitment to repay 3.48 trillion debt via land revenue, accounting for 37.23% of the total debt (9.36 trillion).
This means, “Only if the land prices rise enough to cover the development costs, can the local governments repay the debt,” says the famous financial commentator and columnist Ye Tan.
Keeping land prices rising is a dangerous precedent, obviously, but it seems many local governments don’t have time to question this methodology. Professor Chen Yulu’s opinion is stated in his China, Her Financial History (《中国是部金融史》）, “If currency can’t flow into the high-profit creative industry, it falls to land (trade) to transform into wealth (or perhaps a bubble wealth); it will form a vicious circle.” In other words, land gets more money and draws more cash until over investment or over-construction.
Owing to over-construction, many 3rd and 4th-tier Chinese cities are becoming “ghost cities”, where the newly constructed city neighborhoods remain unoccupied long after they are built. Inner Mongolia’s Erdos and Erenhot, Jiangsu’s Changzhou, and Hubei’s Shiyan are all on the list.
The debt and the shadow bank
It’s obvious that the local governments can’t depend on ghosts to loosen their purse strings, so they look for another way to repay the debt, turning to China’s growing, dangerous, but increasingly regulated shadow banking.
Sources: China’s National Audio Office
The Wall Street Journal
The Wall Street Journal made a comparative investigation on the local governments’ debt categories.Compared to the end of 2010, loans from shadow banking account for 2.0 trillion. The generous cushion provided for investors is that loans from shadow banking typically carry higher interest rates than those from banks, often in excess of 10%, which will lead to more debt.
What’s more,“Intertwined with the under-regulated and poorly managed shadow banking business, slowing economic growth and more liberalized markets, systemic financial risks are increasing,” Chang Jian, a Hong Kong-based economist at Barclays, wrote in a December 31st piece. (from Bloombery “Shadow Banking Risks Exposed by Local Debt Audit: China Credit “)
Two behavior moods toward debt crisis
In Chinese folklore: “When you’re covered with lice, you don’t itch; when you’re up to your ears in debt, you stop worrying.”（虱多不痒，债多不愁。）or “Dead pigs will not worry about being scalded by hot water.” (死猪不怕开水烫).
But, perhaps this comic offers yet another way:
Image source: ifeng (凤凰网）
Yǒurén shuō zhōngguó zhèngfǔ dìfāng zhàiwù yǐjīng shīkòng.
Some people say that Chinese local government debt is out of control.
Guānyuán chēng zhè zhǒng shuōfǎ sǒngréntīngwén.
Officials said this argument is totally unbelievable.
Wǒ gāi xìn shuí de?
Whom should I believe?
Zài zhōngguó dāngrán yào xìn zhèngfǔ de, chúle fángjià.
In China, without a doubt, you should trust the Chinese government, except on the matter of housing prices.
Jíshǐ fāshēng zuì huài de jiéguǒ, dìfāng zhèngfǔ nányǐ chánghuán zhàiwù.
If it gets worse, it’ll be difficult for the local government to repay its debt.
Àn zhōngguó tèsè de fǎ zhǎn móshì, róngyì jiāng zhàiwù fēntān dào quán shèhuì
According to the characteristics of Chinese development, it’s easy to allocate the debt to the entire society.
Master image courtesy of China.org.cn