Skip to comments.Chinese bank calls $1.6 trillion local government debt a timebomb
Posted on 02/11/2013 7:24:46 AM PST by mgist
Chinese bank calls $1.6 trillion local government debt a timebomb
Bridge to nowhere?
The Agricultural Bank of China has sounded the alarm about "impulsive" local governments over-investing in the name of urbanization.
China's official government news agency Xinhua on Saturday reported that local government debt estimated at 10 trillion yuan or roughly $1.6 trillion "has long been considered a time bomb for [the] Chinese economy".
The bank one of the four big banks operating in the country with more than 320 million customers said while growth has slowed along the coastal regions with the exception of the richest province Tianjin which grew a whopping 13.8% ten provincial regions in central and western parts of the country, including Chongqing, Yunnan, Gansu, Tibet and Xinjiang, enjoyed GDP expansion of over 12%.
In 2013 newly elected local governments "are more likely inclined to impulsive investment, and large infrastructure projects will be the key area of investment," the report said, adding that officials may be driven to spend hastily to achieve targets set by central government.
China's spectacular growth has been fuelled by fixed investment in infrastructure which constitutes more than 50% of the economy. That compares to the US where it only makes up 14% of GDP.
RELATED: Here is China's Bridge to Nowhere. It also happens to be the world's longest
The world's metal and mining companies have become increasingly reliant on China's massive infrastructure build-out the country consumes more than 40% of the world's copper, 60% of its iron ore, is by far the biggest importer of coal and almost produces more steel than the rest of the world combined.
Any downshift in this dynamic would have a huge impact on mining companies like BHP Billiton (LON:BHP), Vale (NYSE:VALE), Xstrata (LON:XTA) Anglo American (LON:AAL) and Rio Tinto (LON:RIO) which rely heavily on exports to the country.
Just one commodity iron ore is responsible for 66% of the top five resource diversified resource companies' profits.
While many analysts and outside observers have called attention to the problem of the debt pile and overbuilding by municipalities vividly represented by China's many ghost cities the new report is different.
The wide reporting of the bank study via official channels and the timing of the report on the eve of the Chinese new year may indicate a growing realization of the scale of the problem and the urgency of tackling it.
The Chinese sit on the granddaddy of all real estate bubbles. They have squandered over a trillion dollars building whole cities of apartments, retail space and public facilities. They sit empty and deteriorating with no return on investment. Bank loans are backed by artificially inflated urban real estate prices. Sound familiar? The coming crisis in China could lead to economic decline,political unrest, famine and even war. Chinese citizens themselves are hoarding as much gold as they can get. Those with money wish to emigrate.
Bottom line: Incurring debt when growth exists and is likely to persist is not a bad idea. The Chinese debt “bomb” will likely not go off due to persistent chinese growth.
Bottom line for the USA: Low or no growth is the likely new normal. Our debt will kill us because of it.
The Chinese claim growth, but they cook the books. The world is in a financial crisis, the US is emulating the actions of country’s that fell into financial ruin, and we are printing dollars like crazy. Nobody’s consuming like before. Those trillions we owe them? Worth a lot less.