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China Debt Woes Point To Bank Bailout.

  • Written by Syndicated Publisher 44 Comments44 Comments Comments
    July 6, 2011

    HONG KONG (MarketWatch) — China’s banking system will require an eventual bailout by the central government, according to some analysts, who said figures released last week on the size of local-government borrowings point to the need for a rescue.

    Credit Suisse economist Dong Tao said the numbers backed up concerns he’s been voicing for the past two years on China’s toxic loan problem.

    “Ultimately, we believe that the central government will need to separate the local government’s bank debt from banks’ balance sheets and recapitalize the banks,” Tao said in a note following the release of data on China’s local-debt obligations by the National Audit Office.

    The National Audit Office said on June 27 that local-government debt totaled 10.7 trillion yuan ($1.65 trillion), or about 27% of China’s 2010 gross domestic product. The total represented the tally at the end of 2010 and marked the first time the NAO had released official data on these obligations.

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    The audit office figure included debt directly and explicitly liable by the local governments and 6,576 financing vehicles established by the governments. Figures released by the China Banking Regulatory Commission in November, which counted local-government financing vehicles and subsidiaries, put the figure at 9.09 trillion yuan.

    Tao said a government-led rescue wasn’t likely within the next 18 months, as there were few signs of an imminent crisis, although he added that recent press reports have indicated preliminary government steps towards a bailout.

    Reuters reported last month that Beijing is considering a bailout that could see the central government accept to 2 trillion to 3 trillion yuan of local governments’ outstanding debt in an effort to ensure against a mass default, which could bring down the economy.See report on China’s initial bailout plans.

    Stress is building within the system, Tao said, as local governments face a growing pile of debts coming due at a time of declining land sales, normally a key revenue stream for the provincial authorities.

    Meanwhile, local governments are also having trouble finding new sources of lending as state-controlled banks grow increasingly wary of their deteriorating ability to service existing debt.

    Emerging crisis

    Standard Chartered said last week there were early signs of major financial distress building at the local government level.

    Anecdotes of local-government investment vehicles in Shanghai and in Yunnan province struggling to meet loan payments “signal the beginning of the wave of difficulties,” Standard Chartered’s China economist Stephen Green said in a note Thursday.

    Green said he was upbeat on China’s ability to grow its way out of the problem, given its relatively modest debt profile, which he estimates at 71% of GDP.

    Still, he also expects painful work ahead, estimating interest expense due this year on local government debt and their vehicles at 880 billion yuan.


    Some local governments, he said, were working with banks to arrange emergency funding to avoid default, Green said.Shared From And Read More

    China debt woes point to bank bailout Emerging Markets Report – MarketWatch.