Chinese Bankrupt Cities and Companies

Debt is a dangerous financial tool for private firms and for city, state, provincial, and federal governments. “Debt Crisis Shakes Chinese Town, Pointing to Wider Problems,” (New York Times, April 25, 2017) reports:

… Local companies had agreed to guarantee hundreds of millions of dollars of one another’s loans. When some of those loans went bad, the impact rippled across the city.

Zouping’s plight offers a sobering example of the problems that could lurk within China’s vast and murky debt load. A nearly decade-long Chinese lending spree drove growth but burdened the economy with one of the world’s heaviest debt loads, equal to $21,600 worth of bank loans, bonds and other obligations for every man, woman and child in the country. Debt in China has expanded twice as fast as the overall economy since 2008.

Debt problems are also significant

The China Debt Crisis Is Still Ripening,” (Wall Street Journal, May 2, 2017) looking at China’s shadow debt market:

Already, a big rebound in “shadow finance,” primarily bank-mediated company-to-company loans, is papering over the cracks in China, blunting the impact of the tighter corporate bond market. While corporate bond debt outstanding fell by 58 billion yuan ($8.4 billion) in the first quarter of 2017, shadow finance ballooned by more than 2 trillion yuan, nearly twice as much as in the fourth quarter of 2016.

As the US/China topic debate season draws to a close, it looks like the long predicted collapse of the Chinese economy won’t happen in May or June. The key question is how much Chinese government banks loaning to state-owned enterprises, combined with casino like shadow lending has distorted the still-expanding Chinese economy.

Traders Are Worried About China Local Government Debt Again,” (Bloomberg, April 6, 2017) looks also at expanding local government debt:

This new-found anxiety is a blow to a market that had started to recover in 2016 from the liability web that entangled local governments and their financing vehicles after 2008. Despite not seeing any defaults, LGFV bonds became the poster children for China’s ballooning debt problem. For many investors, the debt is symbolic of the country’s excesses in the wake of the global financial crisis, when municipalities — barred from issuing bonds on their own — used the vehicles as a way of meeting funding shortfalls.

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