Thursday, October 24, 2013

WSJ: China's debt "getting kind of scary."

Something to watch (WSJ):

China’s National Audit Office last estimated in 2010 that local-government debt stood at 10.72 trillion yuan ($1.75 trillion), or 27% of GDP. But, by all accounts, it has exploded since then, with some estimates suggesting that the load now accounts for 60% of the economy, much of it generated by special investment vehicles that were able to bypass nationally imposed borrowing limits. (For those familiar with Wall Street’s pre-crisis borrowing tactics, the acronym SIV will sound ominous.)

Beijing is not innocent in this buildup. For years, the central strategy was to set a national annual growth target–in previous years, it was repeatedly set at 8% or higher–and make it clear to provincial and municipal authorities that they were expected to meet that. For local officials the solution was simple: procure (or seize) land and then borrow money to develop it, often with little regard for how much future demand there would be for the new houses and office building.

These entities created what Kynikos Associates hedge fund manager Jim Chanos calls the “treadmill to hell.” At some point, they had to get off. And when they did, they’d be left with an unsustainable debt. That moment is looking more and more as if it has arrived.

No wonder the government is preparing both the lenders and borrowers for the pain to come.

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