COLOSSAL CHINESE DEBT RESTRUCTURE UNDER WAY
Regimes may come and go, democracy may not be present, and markets may be directly regulated by stomping jackboots….but bankers will never change.
Clear information is coming out of China today showing the huge extent to which the nation’s banks have overlent, and the huge extent to which their clients in local government are over-leveraged. For Chinese banks, insert eurobanks. For local government, insert EU member States. It is exactly the same syndrome: dirt-cheap money to accelerate growth turns into an unscaleable debt mountain.
For a start, many of these loans require interest-only payments over much of the repayment period. On a great many of the loans, the loaned principal is waived completely: not so much debt forgiveness as loan forgiveness. Absolutely crazy.
Now, under direct orders from Beijing, banks have restructured the loans to 3-5 times the original duration: the only laternative, it has become apaprent, would be local government default on a massive scale. The sum we’re talking about is estimated by some to be in excess of $2.2 trillion – that’s getting on for two-fifths of Chinese gdp.
A desperate Beijing is using a three-pronged approach: deferrment of maturity (outlined above), direct bailout from the National Bank where the default is already at or near reality, and further ‘forgiveness’ in the form of lowered rates on top of deferred maturity. I understand that while all three have been attempted, the last is becoming the bailout of choice.
While this is only more can-kicking, the big difference with China is that the debts are largely domestic in nature and origin: and of course, even if this were not the case, Beijing formally guarantees all local government debt as a matter of course. There is thus a bailer-out of last resort.
But that Beijing bailing is going to use several billion yards of Yuan paper….another dimension to add to previous fears about inflationary factors in property.
All of which is going to make Barroso & van Rompuy’s offertory plate at tomorrow’s summit look even more cheeky….and even less likely to attract any donations.
Other things making all this seem horribly familiar:
On 4th January last the Beijing government announced that it had discovered ‘certain irregularities’ in bank loans to local government. $85 billion worth to be precise.
Four days later, Channel News Asia reported that local governments across China borrowed billions in a splurge of building bridges, apartments and shopping malls, leaving many insolvent and endangering the country’s financial system. It estimated that local government had borrowed 10.7 trillion yuan ($1.7 trillion) — 27% of GDP — by late 2010. So it’s pretty clear that the madness has continued: Moody’s, for example, thinks the size of the debt is somewhat economical in its estimate.
It’s the species, stupid.
The Slog 