China has $1.5 trillion in hidden debt: Lawmaker

[JayATL]

BEIJING: Billions of dollars of debt racked up by local Chinese governments during their investment sprees are likely to sour as the projects they finance near completion, Yin Zhongqing, a prominent Chinese lawmaker, said this week.

In an interview with Reuters Insider, Yin said local governments had incurred at least 10 trillion yuan ($1.5 trillion) of "hidden" debt, which they have concealed by creating thousands of investment vehicles that serve as borrowers.

Yin said it is not yet clear which loans will sour because they do not have to be repaid until the projects are completed.

"The large amount of debt that local governments took on since the end of 2008 to battle the impact of the global financial crisis will become a heavy burden for our development going forward," said Yin, who is a member of the finance and economic affairs committee in China's parliament.

He highlighted the high risk of default in the low-level county governments, which Yin said have little financial resources.

"Seventy percent of the loans from these investment and financing platforms in 2009 and 2010 were generated at the county level, where governments don't have much assets, and some cannot even afford to pay their staff," he said.

"Debts accumulated from these platforms, even with government financial guarantees, simply cannot be paid back. In other words, when they borrowed the money, local governments did not plan to pay it back."

Local Chinese governments are barred by law from borrowing directly. To pay for their ambitious growth plans for cities, they set up investment vehicles that take out bank loans backed by assets, typically land, or implicit government guarantees.

They do not show up in official central government debt accounts. But Yin said these debts will ultimately have to be written off by Chinese banks and Beijing. "In 2009 and 2010, we encouraged them (local governments) to increase debt and run deficits to stimulate investment. Local governments' debt problems will come to light in 2011," Yin said.

He said local Chinese governments were still pursuing breakneck growth rates despite pleas from Beijing to slow down to let the economy tread a more steady and sustainable path. "We need to use macro controls to pull it back and lower it to a reasonable level," Yin said.

While the problem of "hidden" debt among local governments is not new to China, its massive three-year stimulus programme in the wake of the 2008 financial crisis exacerbated the issue. China's bank regulator estimated last year that local governments have racked up 7.66 trillion yuan in debt as of June 2010, of which 26 percent is unlikely to be repaid.

But the regulator put a brave face on the problem by saying the risks are under control since most loans can eventually be repaid using income earned from their investment. It also said banks are well protected against defaults because they have already set aside adequate provisions.

Yin warned against complacency, however, and said China's debt ratio was much higher than what official data suggests. Beijing has said its fiscal deficit will fall below 2.2 percent of gross domestic product (GDP) in 2010, while its total debt will be less than 20 percent of GDP.

"China's rapid development has covered up many problems. But once economic growth slows down, these problems will emerge as stones rise when water levels fall," Yin said.

 

[badguy2000]

I know quite well about it,because I am the one who is in charge of Governmental Vehicle loans in the bank. What I am busy with all day and all night now is to negotiate with local government how to deal with those hidden loans.

Ok, since people are so interested in the "hidden loans" soo much,I share something I know about it with you.

1. what are those 'hidden loans" ?
they are "governmentel vehicle loans".
Chinese laws forbids Chinese governmental administrations to borrow loans directly from banks.so Chinese local governments had to establish some special companies and borrow banks loans indirectly with those speical companies..
those "special companies" are called "governmental vehicles" and most of them has no real commerial operational income except budgets from local government.


2.how much are those "hidden loans"?
it is estimated to be about 7-8 trilion RMB(about 1.2-1.3 trillion USD). allmost all of them are borrowed by Chinese local governments.

3.what is the use of those "hidden loans"?
Most of them are invested on urban infrastructures.

4. With what do Chinese local governments plan to repay those "hidden loans"?
Land-granting fees.
In 2010, CHinese local government acqure 2.7 trillion RMB land-granting fees.
either Shanghai or Beijing acquired over 150Billion RMB land-granting fee last year.

5.what is the problem now?
a. such huge aquiring of land-granting fee is not sustainable.
In 2010, CHinese local government acqured 2.7 trillion RMB land-granting fees.but it increases much the cost of house-building and make house-price rocket. for the social stablity, CCP will have to suppress the rocketing house-price. so the cut-off of land-granting fee is inevitable in a long rum.

b.the unbalanced distribution of land-granting fees between areas.
Some local governments can acquire huge land-granting fees.for example, the local government of either Shanghai or Beijing acquired over 150Billion RMB land-granting fee last year.they can easily repay their "hidden loans".
However, some local governments of undeveloped areas, espeically the local governments of those inland counties acquire quite limited land-granting fees.if those "hidden loans" were not to rearranged,those counties's government would have huge problem .


6. will Chinese economy collapse for those "hidden loans"?
No.

a. 7-8 trillion RMB "hidden loans" is not unaffordable to CHinese government .
Most of the 7-8 trillion RMB" hidden loans" are long-term loans and needn't repaying soon. while the real yearly income that Chinese government can use is about 11.4 trillion RMB in 2010.

(Last year,Chinese government normal revenue totals 7.7 trillion RMB. Besides, it acquired 2.7 trillion RMB land-granting fee last year.Furthurmore, Chinese state-owned enterprises will hand over over 1 trillion RMB proceeds to Chinese governments.)

b. those "hidden loans" can be rearranged easily.
Almost all banks in China are controlled by Chinese governments. To CCP bosses, the "hidden loans" between Chinese governments and Chinese banks are just the quarrel between their two sons.


BTW, since mid 2010, CCP bosses really have paid serious attention to those "hidden loans".
"serious measures" has been taken to cure the problem. What I have been busy with during the past half year is to deal with it. As a whole,such "hidden loans" started to decrease several months ago.

however, Once Chinese local governments repays off those "hidden loans" ,they would have to decrease the investment on infrastructures. Once such investments deceases, "land-granting fees" would decrease much.
So,the real preblem Chinese local governments face now is not how to repay those "hidden loans",but how to keep their budget balance after "land-granting fee" decreases.

 

[Ray]

What exactly is the issue?

Why is it being called a 'hidden' loan

I thought all loans are recorded in the books and it is audited. So, how is it 'hidden'?

How does it impact the growth?

Is it serious?

What is the answer?

I do hope someone could explains these in clear and not financial terms.

 

[Blackwater]

all the glitters is not gold

 

[p2prada]

What exactly is the issue?

They believe $1.5Trillion is not shown to the govt, or rather the govt is hiding real loan figures in order to look attractive enough to get FDI.

This is similar to the Satyam scam sir. They made up false number of employees and false growth projections to attract better deals. As time passes it becomes too big to hide. Here, Raju was caught and thrown in jail with management change in Satyam. But who can throw CCP into jail?

Why is it being called a 'hidden' loan

Whenever banks loan out money, there is a certain amount of money that is lost due to bad investment. For eg; if I buy a car and I don't pay interest then I lose the car. But what will bank do with a second hand car? Reselling the car will not give them their original sum back. So, this becomes a Non performing loan. The amount that is not recovered is gone.

Now, in India all of this is open information. But in China they do not show this amount to World Bank, IMF etc.

So it affects growth calculations and investors will follow fudged figures for investment.

I thought all loans are recorded in the books and it is audited. So, how is it 'hidden'?

As simple as keeping 2 different books. One for them to audit and the other for foreign entities to audit. The Chinese central auditors are not like the CAG in India.

How does it impact the growth?

In China, after the financial crisis, huge sums of money was loaned out to industrialists by banks who tried keeping their factories running. But if US is no longer buying then the Industrialists shut shop and spend the money elsewhere. Since the factory shut down, the industrialists will say they cannot return the loans. The banks take over their factories at cheap rates. A loss is a loss and the money is gone.

But if they hide this fact from the outsiders. Then all they will see is that Banks in China are actually profiting much more than their banks in their respective countries. So, money starts pouring in.

Is it serious?

Very, very serious. After a certain point cooking books will become unsustainable. Banks will announce bankruptcy. Share market will collapse. Companies who can no longer secure loans will shut shop or sell assets to make more money. That will further reduce their share value. Anything you invested from outside China, the growth disappears and your investment actually goes for a toss.

From what is known, Non performing loans are actually 20% of their total loans. While in India it is 2%. That's why they say Indian banking conditions are much more suitable for growth.

What is the answer?

There is none. If this gets out officially then China will be in deep sh*t. Same as Satyam. A lot of people will be executed and lot of businesses will shut down. New economic policies will be formulated and China will be forced to trade Yuan for more Dollars to stabilize their economy. Yuan prices will rise along with inflation.

Of course the picture I am showing is quite extreme. But there will be major ramifications if an economy the size of China is cooking books.

 

[JayATL]

all the glitters is not gold

their gold is still 4 x ours in India..

 

[JayATL]

What exactly is the issue?

Why is it being called a 'hidden' loan

I thought all loans are recorded in the books and it is audited. So, how is it 'hidden'?

How does it impact the growth?

Is it serious?

What is the answer?

I do hope someone could explains these in clear and not financial terms.

1. What this says is 1.5 trillion dollars of stimulus money was borrowed by the state govt from the central govt during the financial crisis to boost the local state govts. economy.
2. Those loans were guaranteed by banks and the central govt.
3. the state govt wanted these loans to start several projects ( infrastructure etc), where they would have to pay for these projects in full when they were completed.
4.. That date is coming close and they will have to pay for it-
5. STATE having NO intention of paying back the central govt. it will hence create a debt on their books of 1.5 trillion ...

Is it serious- Yes! . its is a big disastrous deal and spells gloom and doom in the big picture- NO. they can handle that hit on their debt/ deficit, especially given their growth.
it won't impact their growth much, just like it never impacted the US growth while their deficits grew. ( this is under normal circumstances and not when we had a GLOBAL financial meltdown)
All of this is /was audited and on the books . It was not cooked up. The central govt and banks knew this. The banks are guaranteed loans by their central govt

 

[JayATL]

They believe $1.5Trillion is not shown to the govt, or rather the govt is hiding real loan figures in order to look attractive enough to get FDI.

This is similar to the Satyam scam sir. They made up false number of employees and false growth projections to attract better deals. As time passes it becomes too big to hide. Here, Raju was caught and thrown in jail with management change in Satyam. But who can throw CCP into jail?



Whenever banks loan out money, there is a certain amount of money that is lost due to bad investment. For eg; if I buy a car and I don't pay interest then I lose the car. But what will bank do with a second hand car? Reselling the car will not give them their original sum back. So, this becomes a Non performing loan. The amount that is not recovered is gone.

Now, in India all of this is open information. But in China they do not show this amount to World Bank, IMF etc.

So it affects growth calculations and investors will follow fudged figures for investment.



As simple as keeping 2 different books. One for them to audit and the other for foreign entities to audit. The Chinese central auditors are not like the CAG in India.



In China, after the financial crisis, huge sums of money was loaned out to industrialists by banks who tried keeping their factories running. But if US is no longer buying then the Industrialists shut shop and spend the money elsewhere. Since the factory shut down, the industrialists will say they cannot return the loans. The banks take over their factories at cheap rates. A loss is a loss and the money is gone.

But if they hide this fact from the outsiders. Then all they will see is that Banks in China are actually profiting much more than their banks in their respective countries. So, money starts pouring in.



Very, very serious. After a certain point cooking books will become unsustainable. Banks will announce bankruptcy. Share market will collapse. Companies who can no longer secure loans will shut shop or sell assets to make more money. That will further reduce their share value. Anything you invested from outside China, the growth disappears and your investment actually goes for a toss.

From what is known, Non performing loans are actually 20% of their total loans. While in India it is 2%. That's why they say Indian banking conditions are much more suitable for growth.



There is none. If this gets out officially then China will be in deep sh*t. Same as Satyam. A lot of people will be executed and lot of businesses will shut down. New economic policies will be formulated and China will be forced to trade Yuan for more Dollars to stabilize their economy. Yuan prices will rise along with inflation.

Of course the picture I am showing is quite extreme. But there will be major ramifications if an economy the size of China is cooking books.

I'm sorry your interpretation is grossly incorrect. practically all of what you have said. please read my reply to him.

 

[p2prada]

I'm sorry your interpretation is grossly wrong. practically all of what you have said. please read my reply to him.

Replace industrialists with Local provincial govts and factories with local projects and you have the same story.

The banks created hundreds of thousands of car loans(borrowers) to hide the bad loans. Those cars do not exist and neither do the borrowers.

 

[JayATL]

I know quite well about it,because I am the one who is in charge of Governmental Vehicle loans in the bank.

What I am busy with all day and all night now is to negotiate with local government how to deal with those hidden loans.

Is that for a govt run bank or private bank. My assumption is these loans were made by govt banks or if private banks, the it was guaranteed repayment of loans by the government.

 

[Rage]

their gold is still 4 x ours in India..

Not quite so.

As of December 2010, per IMF Monetary figures, China's gold reserves are 1,054.1 and India's 557.7 metric tonnes. That makes China's reserves about x2 ours. Largely due to the purchase of 200 metric tonnes of gold by India from the IMF last year, the largest single recorded purchase in history.

Officially, China's gold reserves are ahead of ours. But India's civilian gold reserves are estimated to be between 16,000-17,000 metric tonnes. About the Euro Area's and the United States' combined. If India ever wanted to purchase gold and diversify its reserves, it could do so in fairly large quantities from its own civilian populace.

As for the issue at hand, prada has explained it nicely. There is also something called the Extra Budgetary Revenue, which badguy2000 may shed some light on.

 

[Armand2REP]

In short, local governments in China have taken out bank loans hidden by "investment vehicles." These are not reported as part of China's official debt so it is not on the books. PBOC had to run a massive audit last year to figure out just how much liability is in the system. The national auditor reported 4 trillion RMB in bad loans, or $585 billion last June.

http://www.nytimes.com/2010/06/26/business/global/26yuan.html

The local governments use land sales to back up loans, then take out more loans to pay interest on the ones already taken out. If land values remain high, then it isn't a problem because there is enough collateral for PBOC to collect. If values collapse, then they will have to bail out all these bankrupt municipalities. One thing I noticed living in an area like GZ is that the fancy toll roads they have here go largely underutilized. It wouldn't suprise me if they are losing massive money on one of the most populated areas, much less toll roads in the backwoods of China that never get used. So many empty buildings and unfinished construction projects, it is bad debt waiting to blow up.

 

[p2prada]

Is that for a govt run bank or private bank. My assumption is these loans were made by govt banks or if private banks, the it was guaranteed repayment of loans by the government.

The 4 biggest banks are govt. So, it is a govt bank providing loans to state govts. Private banks do not take such risks.

CCP controls everything.

 

[thakur_ritesh]

the most interesting thing that has come across from this is that stimulus package was not 580b usd odd which was the talk all this time but way more to the tune of 1.5t usd, now when that is calculated as a % of 4.5t usd (china's gdp in 2008) it stands at 33% which is a massive stimulus package and all that money just to attain a growth rate of 10% over the next few years.

rest assured there are indeed a huge number of bad debts there, and a lot of bubbles waiting to burst some of which will never see the light of the day in the news. there is quite a lot of rot somewhere there.

may be badguy can keep us updated since he is going to be managing a lot of this mess!

 

[JayATL]

the most interesting thing that has come across from this is that stimulus package was not 580b usd odd which was the talk all this time but way more to the tune of 1.5t usd, now when that is calculated as a % of 4.5t usd (china's gdp in 2008) it stands at 33% which is a massive stimulus package and all that money just to attain a growth rate of 10% over the next few years.

rest assured there are indeed a huge number of bad debts there, and a lot of bubbles waiting to burst some of which will never see the day of light in the news. there is quite a lot of rot somewhere there.

may be badguy can keep us updated since he is going to be managing a lot of this mess!

580 billion of stimulus ws direct cash infusion to prop the various institutions. Investments are higher , hence the discrepancy.

YOU DO NOT WANT CHINA TO FAIL... because they tied to a global market and invested so heavily, that if they fail. it will create an global economic crisis and adversely effect India! India is still NOT diversified where a Chinese economic failure won't hurt them much.

 

[JayATL]

Not quite so.

As of December 2010, per IMF Monetary figures, China's gold reserves are 1,054.1 and India's 557.7 metric tonnes. That makes China's reserves about x2 ours. Largely due to the purchase of 200 metric tonnes of gold by India from the IMF last year, the largest single recorded purchase in history.

Officially, China's gold reserves are ahead of ours. But India's civilian gold reserves are estimated to be between 16,000-17,000 metric tonnes. About the Euro Area's and the United States' combined. If India ever wanted to purchase gold and diversify its reserves, it could do so in fairly large quantities from its own civilian populace.

As for the issue at hand, prada has explained it nicely. There is also something called the Extra Budgetary Revenue, which badguy2000 may shed some light on.

thats good info to know. i was being loose with my comment , in that , I was saying no need to slam them.

 

[LETHALFORCE]

580 billion of stimulus ws direct cash infusion to prop the various institutions. Investments are higher , hence the discrepancy.

YOU DO NOT WANT CHINA TO FAIL... because they tied to a global market and invested so heavily, that if they fail. it will create an global economic crisis and adversely effect India! India is still NOT diversified where a Chinese economic failure won't hurt them much.

There is a huge export gap between India and China in favor of China; how would this be bad if India has to make what it imports from China domestically??

 

[Armand2REP]

the most interesting thing that has come across from this is that stimulus package was not 580b usd odd which was the talk all this time but way more to the tune of 1.5t usd, now when that is calculated as a % of 4.5t usd (china's gdp in 2008) it stands at 33% which is a massive stimulus package and all that money just to attain a growth rate of 10% over the next few years.

Chinese stimulus plan is simple... it is called lend lend lend. They don't do it through direct public financing, they do it through massive bank loans. If you look at how much money they have to lend to create one point in GDP, it is like a 8:1 dollar ratio. It is the most inefficient use of funds on the planet.

rest assured there are indeed a huge number of bad debts there, and a lot of bubbles waiting to burst some of which will never see the day of light in the news. there is quite a lot of rot somewhere there.

There is definitely going to be a day of reckoning, the question is how well can CCP hide it. They already had a bank crisis a decade ago and those bad debts are STILL floating around the system, only 20% of it was recovered. They deal with it by issuing bonds that they just keep rolling over. All those ten year bonds from the last crisis have already been rolled over. With a real rate of 30% NPL on Chinese banks, they are going to have to roll over trillions into bonds again. Just as usual, they will never get paid.

may be badguy can keep us updated since he is going to be managing a lot of this mess!

Badguy been here for a while. He refuses to share anything revealing.

 

[JayATL]

There is a huge export gap between India and China in favor of China; how would this be bad if India has to make what it imports from China domestically??

this is not as simple as our trade with them , but their investments globally, which will fail , leading to those countries having an economic crisis , leading to them not investing in India. This is why we call it a global economy... everybody gets effected when the big boys fail. China has bought up a lot of treasuries and loans of diff countries, if they fail , guess what? they will sell those treasuries. creating a huge economic FUBAR in those countries.

 

[LETHALFORCE]

this is not as simple as our trade with them , but their investments globally, which will fail , leading to those countries having an economic crisis , leading to them not investing in India. This is why we call it a global economy... everybody gets effected when the big boys fail. China has bought up a lot of treasuries and loans of diff countries, if they fail , guess what? they will sell those treasuries. creating a huge economic FUBAR in those countries.

It will impact USA more for 2 reasons US economy is still in the great recession and US has put all it's eggs in the Chinese basket, as far as others go it will impact Japan to an extent but Middle East and Europe will have little impact since they have diversified their investments abroad. But even US has many cash rich institutions which will contiue investments abroad and as far a Chinese selling treasuries go If there are no buyers there is no sale. US government will have the upper hand if/when to buy the treasuries. The real threat is if things get bad enough the communist government takes over foreign assets.