Beijing's Great Bailout to Defuse Ticking Local Debt Bombs

EconMatters's picture


By EconMatters


In the previous post, we briefly mentioned that

"....there could be some hidden debt bombs as a recent Bloomberg finding suggests that China's banks may be understating their exposure to runaway local borrowing by possibly billions of dollars that is raising fears of a government bailout."

Here are more details.  It appears that based on a Bloomberg News survey, the construction boom by many local governments as part of China's stimulus program that started in November 2008 have now become too big to complete and may require a bailout even bigger than the Euro debt crisis.


From Bloomberg and chart below [emphasis ours]:

"Provinces and cities are going deeper into the red to finish projects....With prices dropping in China’s real estate market, economists warn that local authorities won’t be able to repay their debt because of poor cash flow and falling revenue from land sales they rely on for much of their income.  

"Local authorities, who shoulder most of the infrastructure spending in China, have to keep borrowing to complete projects so they can generate cash flow needed to start paying debt back, said Vincent Chan, head of China research at Credit Suisse Group AG (CSGN) in Hong Kong.

Yao Wei, an economist at Societe Generale (GLE) SA in Hong Kong, says another 7 trillion yuan of debt ($1.1 trillion) will be needed to finish projects in the government’s five-year plan through 2015."

In July of 2011, Moody's also said it found more potential loans by local governments after accounting for discrepancies in figures estimated by China's state auditor--10.7 trillion yuan of debt. By Moody's estimate, China's local government debt burden may be 3.5 trillion yuan ($540 billion) larger than auditors estimated, putting banks on the hook for deeper losses that could threaten their credit ratings.

"This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency," said Yvonne Zhang, a Moody's analyst.

For comparison purpose, the combined ceiling of the European bailout funds--EFSF (European Financial Stability Fund) and ESM (European Stability Mechanism)--is about $652 billion.


According to, both Ministry of Finance and Ministry of Railway have experienced increasing difficulties in selling local and muni bonds partly due to concerns about the creditworthiness of local governments.


Fiscal disciplines at local level or a Beijing bailout are two options to defuse the growing debt bombs. Unfortunately, a confluence of factors suggests meaningful lending curb as well as fiscal discipline could not be expected in the near term.  A main factor pushing Beijing's pendulum towards monetary easing is that China's export demand is deteriorating with possible zero export growth in 2012; whereas government analysts estimate that China needs annual export growth of at least 15% to ensure stable economic expansion as the rate of domestic investment cools.


Since Chinese local governments, unlike the U.S. municipality, do not have the option of filing for bankruptcy, Beijing most likely would need to do a great bailout of local authorities either in installments or at one fell swoop.


Will this lead to a crisis or hard landing to sink China?  Well, crisis typically forms in stealth and erupts when you least expect it, just like when investors felt safe with subprime mortgage packages being given top credit ratings.  Then the ensuing fear and capital flight would take care of the rest of crash.


In China's case, alarms on local debts have already been raised by many investment analysts, academia, as well as by the Chinese officials.  Shanghai Composite Index has dropped 21% in the past year suggesting a lot of this risk has already been priced into the markets.


Furthermore, the amount of debt, although a big chunk of change by any standard, is within the reach of Beijing's coffer.  Instead of a worldwide DEFCON 1 crash alert, China's central government most likely is already doing some mini-bailouts behind the scene, and would continue to mop up as to ensure stability.  So that means the China Dragon probably will be trapped in the shallow water at least for the next 2-3 years.               


Further Reading:

Debt Crisis 2012: Forget Europe, Check Out Japan

A Few Chinese Bad News Bears To Spoil A Happy New Year


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Iconoclast's picture

Tbh if I had to pick a winner I'd pick China over the mess that is the USSA

sampak101's picture

I really like your way of expressing the opinions and sharing the information. It is good to move as chance bring new things in life, paves the way for advancement, etc.
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non_anon's picture

ha ha, debt bombs, bitchez!

AndrewCostello's picture

They are doing exactly what Australia has been doing for years.  They keep bad loans on the books and keep on adding on more and more interest, falsely pumping up their balance sheets.


I suspect that Australia will go down before China, but who knows?





billsykes's picture

My jaw dropped when Chanos said that the chinese banks did'nt write off their bad 2004 loans but added them as bonds and kept them on the books at par. Now I read in bloomberg that loans are being given interest holidays for 2 months.


LookingWithAmazement's picture

Central gov. will bail all the local crap out. No crisis. Boring world we live in.

swani's picture

The Chinese are good at copying. I'm sure they can figure it out. 

mailll's picture

Yea, they are copying the USA with their real estate bubble. Our real estate bubble burst, and it's a matter of time before their construction boom becomes unsustainable also.  And once the Federal Reserve stops purchasing our treasuries (in secret of course), our bond market bubble will burst also and our dollar will become very weak as a result.  Hopefully the dollar survives though because I don't want the New World Order currency.

steve from virginia's picture


What a howl! China banks need a bailout in order to bail out the bailout: a bailout bailout.

Can a bailout-bailout-bailout-bailout be far behind?

What I wanna know is when are Chinese going to take some executives outside and shoot them? Is this going to be on TV?

It gets serious when the establishment gets to the bailout-bailout-bailout-bailout-bailout-bailout phase ... Maybe next week.

I feel sorry for the Chinese, they are so new to this 'capitalist roader' nonsense, Twenty short years they were holding high that Little Red Book. Now they have high speed rail crashing into each other over and over again.

The Chinese are like sheep getting butt-fucked first then shorn. They are losing all their money, Wall Street strikes again. Hoorah! America is Number One!

Wait until the Peoples Bank starts printing ... Oops! Been there, done that ...

( bailout-bailout-bailout-bailout-bailout-bailout-bailout-bailout-bailout-halibut-halibut ...)

ozziindaus's picture

Don't be too surprised if one of those bailouts indirectly comes from the US. It happened already with GM. Whilst GM NA had their pathetic hand out begging the US and Canadian taxpayer for a loan/gift, SGM (Shanghai GM) were building multi billion $ development centers in China. This entity was of course immune to any recourse or dividend sharing by US tax payers. We were left with the rust heap and China received the brand spanking new facilities. 

PulauHantu29's picture

I was afraid you would bring China's problems up again. China's recession will be Australia's recession too.

Can you ( or anyone) do a breakdown of exports to China from Brazil, Australia, etc to show what  a Middle Kingdom slowdown means for their trading partners? Nice if you can do it in graph form with colors::))


SAT 800's picture

Of course they'll bail them out; but it doesn't matter. They don't have the same financial system we do; but they do have a centrally controlled fiat monetary unit; if they wish to make good paper losses in the banks they can; there will be no downside to this action. It's profoundly irrelevant.

qussl3's picture

Yes they can wipe the slate clean, but there are consequences.

Bad credit wiped clean in that manner gets into the system much like printing notes into circulation.


JW n FL's picture



Europe IS! Grinding to a Halt (as I am type this).

China's Great Big Lie of servicing their debt thru building 10 to 15 Empty Cities a year IS! Catching Up With Them (as I am type this).

America's Printing Press IS! Hot To The Touch (as I am typing this).

There IS Not Enough Cheap Oil to go around (as I am typing this).

The slowdown IS! NOT!! about Financial Markets!

It IS! about Lite Sweet Crude or the Lack There Of!

There are trillions more floating around in cross jurisdictional dark pools!

There are Corporations sitting with Trillions in Reserves!

There is LOTS of CASH! what there is NOT! a LOT of is Cheap Energy!

The World Economic Model is Broken! Wage Arbitrage that built so many bridges across the World is no longer viable, thusly the Trade Wars are beginning!


       · Duties 0-35% (motor vehicles 34.2%)

       · VAT 17%

       · Consumption Tax 5-10%

       China will levy anti-dumping taxes of up to 22 percent on American car imports, potentially making US-made cars prohibitively expensive in this country.


The only thing left to do is fire the first shot!



Magua's picture

The thought crossed my mind that Chinese banking and their exposure to commercial development reminds me of Texas in the mid to late 1980s. Most Texas local banks started out with modest RE exposure, maybe 5% to 10%. But the development loan fees were too good to pass up, so most of the Texas banks eventually got their exposure up to 30% or more.

What happened here in Texas sounds a lot like China today. Some of the office buildings stayed mostly dark for 5 to 7 years. All the development loans and a lot of the commercial RE came back onto the banks balance sheet. RE prices dropped 40% to 50%, and the nonperforming loans reached 2x to 3x equity.

7 of the 10 largest Texas banks failed and 2 more were merged in larger US banks. Congress Avenue here in Austin lost all of its retailers and restaurants, and became a virtual ghost town.

toadold's picture

I remember when they tore down multi-family condominiums by Lake Ray Hubbard outside of Dallas because they couldn't find anybody to buy them and they stayed empty for too long.  Now rinse and repeat all over the dang world.

ebworthen's picture

The majority of the Chinese people are slaves.

The Chinese government will make them shoulder the debt.

Not unlike the U.S.S.A., but I'd say a Chinese revolution may free more than just the Chinese people.