(Credit: Remko Tanis)
Corporate accounting scandals, subprime mortgage crisis and European sovereign debts concerns aside, the next looming overseas financial crunch to hit Australia and where it can really hurt is China’s mounting municipal debts. The FT and Citibank estimated the bad debts to be around USD 294 billion -350 billion respectively. While there is little doubt that China can cope with this debt, how the Chinese Government is going to reduce the local governments’ bad debt exposure. Could this reduction avoid massive demand cuts for Australia’s commodities that could (directly) impact up to 10% of Australia GDP?
At the start of global financial crisis (GFC), the Chinese government announced a 4 trillion yuan (USD 586 billion) national stimulus plan, with 38% of the stimulus allocated to infrastructure projects. Local banks lending limit were lifted, and urged to support the country’s growth in midst of the GFC. The market became awashed with easy money and local governments embarked a massive infrastructure spree. Many such projects were being financed through quasi-independent companies. Some of such companies were created by local governments in order to subvert lending restrictions imposed on Central government.
Last week, these practices finally hit the headlines when Liu Jiayi, the Head of the National Audit Office, in a report to the National People Congress (report in Chinese), cast doubt whether those over-exposed local government has the means to repay their loans or would ended up as bad debts? The State Council (China’s Cabinet) responded by ordering all provinces to review all debts, cease illicit local financing and investment and detail a financial health report by end of 2010.
Undoubtedly this directive would result less infrastuture projects and decrease demand for Australian commondites. The Australian mining industry and the Australian Bureau of Agricultural and Resource Economics (ABARE) will want to incorporate this development in their mid-term growth forcast in light of the weakness in the global banks.
- Looking into China’s local government debts (People’s Daily)
- State Council Orders Local Governments to Review Debt of Financing Platforms (Economic Observer)
- Legless Stimulus in China (previously published on Asian WSJ)
- How Victor Shih Get China’s Debt So Wrong (China Stakes)
- Moral Hazard and China’s Banks (WSJ)
- Local government finance and municipal credit markets in Asia (ADB)