Now Worries About Chinese Municipal Debt

NYT reports:

The Chinese government has begun a series of investigations of how much debt was incurred by local governments last year as part of economic stimulus programs undertaken in response to the global financial downturn.


Few experts expect anything like the European debt crisis to afflict China. The national government has very little debt by international measures and ample capacity to bail out local governments and banks that lent to them.

But any potential rise in defaults by local governments that require assistance from Beijing could add to the central government’s liabilities, leaving less room for the government to spend money as the Chinese population ages...

Liu Jiayi, head of the National Audit Office, said in a report to the Chinese Congress in the past week that borrowing by local governments had created public debt burdens totaling hundreds of billions of renminbi. The report questions whether those governments had the resources to pay down the loans.

 The warning is the latest indication that a portion of the government-backed loans and money from a national stimulus package of 4 trillion renminbi, or $585 billion, could eventually be categorized as bad loans.. Fitch Ratings, the credit rating agency, warned in a report in the past week that record loan growth and aggressive efforts by state-run banks to repackage and sell debt to investors had raised credit risks in the country and could “lead to another financial crisis.”

 In a release issued Wednesday by Fitch, Charlene Chu, the firm’s senior director for financial institutions in China, said that the financial positions of Chinese banks were more strained than they appeared to be and that “future asset quality deterioration is a near certainty.