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China’s Local Debt “Out of Control”


Be warned: there is a growing consensus of thoughtful observers, both Chinese and foreign, who think China’s local government debt is dangerously inflated. Joining the chorus this week is Zhang Ke, the head of an important Chinese accounting firm.

“It is already out of control,” Zhang told the Financial Times. “A crisis is possible. But since the debt is being rolled over and is long term, the timing of its explosion is uncertain…. We audited some local government bond issues and found them very dangerous, so we pulled out…. Most don’t have strong debt servicing abilities. Things could become very serious.”

“[I]t is rare for a figure as established in the Chinese financial industry as Mr Zhang, who serves as vice-head of China’s accounting association, to make such stark comments,” the FT reports.

Several international credit ranking firms, as well as the IMF, have expressed concern with China’s overall economic health in recent weeks, with Fitch suggesting there are serious “underlying structural weaknesses” in the Chinese economy. Zhang’s comments about local debt will only add fuel to these fears.

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  • Luke Lea

    In China the big state owned banks — the ones that ultimately own all this bad debt — have the authority to print money if they don’t have it on hand whenever depositors want to make a withdrawal. All it takes is a phone call from central party headquarters. Since China’s entire middle- and working-class population have most of their savings in such banks (they are given few alternatives) you can imagine what might happen in case of a bank run. Call it “quantitative easing” Chinese communist style.

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