Market Watch

"Out Of Control" Chinese Debt

Oh, how tasty. Nothing like peeking into China’s abyss for a while to take ones mind off of U.S. city bankruptcies. Lets see how China’s positioned in all of this. FT Reports HERE

A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash.

Zhang Ke said his accounting firm, ShineWing, had all but stopped signing off on bond sales by local governments as a result of his concerns.

“We audited some local government bond issues and found them very dangerous, so we pulled out,” said Mr Zhang, who is also vice-chairman of China’s accounting association. “Most don’t have strong debt servicing abilities. Things could become very serious.”

“It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”

Local governments are prohibited from directly raising debt, so they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicles’ names to fund infrastructure projects.

Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013.

“The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”

Mr Zhang added that he grew alarmed when smaller towns and counties discovered that investment vehicle bonds were an easy way to raise financing. “This evolution was quite frightening,” he said. “China has more than 2,800 counties. If every county issued debt, it could lead to a crisis. It could be even bigger than the US housing crisis.”

But Mr Zhang puts little faith in official guarantees, …: “When the time comes, it won’t be the government that assumes responsibility. It will be the accounting firms and the banks that do.”