We've discussed Jiangsu before (dead pigs [10], TBTF Solar companies [11], and bird flu [12]) but the Chinese province (that is big enough to be a Top 20 global economy with GDP greater than that of G-20 member Turkey and 79 million people) is on the brink of collapse under the weight of its own debt (cough Detroit cough). As China's leaders attempt to rein in over-capacity industries, tamp-down residential real-estate bubbles, and generally unwind "...the greatest misallocation of capital the world has ever seen, which was China’s 2009 stimulus," Jiangsu stands head-and-shoulders.
[13]
With debt far higher than its peers, its mainstay industries (shipbuilding and solar panel manufacture) drowning in over-capacity, and massive 'empty' property developments now starved of funding, Jiangsu "can potentially pose a systemic and macro economic risk to the country."
Factories shut-down...
Massive stockpiles of aluminum blocks...
Detroit anyone?
Via The South China Morning Post [14],
The nightmare scenario for China’s leaders as they try to wean the country off a diet of easy credit and breakneck expansion is a local government buckling under the weight of its own debt. Few provinces fit that bill quite like Jiangsu, home to China’s most indebted local government.
Hefty borrowings through banks, investment trusts and the bond market by Jiangsu’s provincial, city and county governments have saddled the province north of Shanghai with debt far higher than its peers, public records show.
Many of the province’s mainstay industries, including shipbuilding and the manufacturer of solar panels, are drowning in overcapacity. Profits are dwindling, and the government’s tax growth is braking hard.
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“China’s local government debt, if not better managed, can potentially pose a systemic and macro economic risk to the country,” said Jun Ma, Deutsche Bank’s greater China chief economist.
“This has historic precedents in Brazil where in the three crises of 1989, 1993 and 1999, the root cause was the state government’s excess debt,” he said.
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local government debt in China at the equivalent of anywhere between 15 per cent and 36 per cent of the country’s output, or as much as US$3 trillion
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Looking at bank loan books, they can see that China’s eastern provinces including Jiangsu have the highest concentration of government debt. Jiangsu then looms large because of its reliance on costlier and alternative forms of financing, which they said suggested that cheaper bank loans and land sales are not giving the authorities the funding they need.
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The risk that Jiangsu might pose to the Chinese economy in a crisis is clear. On its own, the province would be a top 20 global economy with GDP greater than G20 member Turkey. Its 79 million population tops that of most European countries.
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Some major employers in the province have been pushed to the brink... Earlier this month, China’s biggest private shipbuilder, China Rongsheng Heavy Industries Group, called on the local government for financial help as it teetered on the financial brink. Media reports said it had laid off 8,000 workers... Wuxi Suntech, an arm of China’s biggest solar panel maker, earlier this year filed for bankruptcy protection.
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In other signs of stress, Chinese national media have reported that some struggling localities are forcing employees to raise funds for them... The government of Binhu district in Wuxi tried to dock civil servants’ wages as it was running out of cash
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As Beijing has clamped down on bank credit for local governments, Jiangsu’s fund raising using alternative financing, or shadow banking, has soared.
Governments in the province accounted for 30 per cent of all investment trusts sold in China last year, Shenzhen-based data provider Use-Trust said.
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“The market would welcome some controlled defaults to check the moral hazard but I am not sure if the Chinese government is ready to do that,”
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In the southern part of Wuxi, where several steel trading firms and warehouses are located, some workers say business has never been so slow.
“There are many companies with no cash,” said Eva Chen, who works at a distributor for one of China’s state steel makers. “If they have no cash, we don’t give them the goods. Our focus right now is to grab sales and grab cash.”