One of the frequently cited bright sides of the Chinese growth story is the nation’s [reportedly] advantageous fiscal situation, allowing it to enact relatively large stimulus measures. This is [reportedly] due to a large trade surplus, which gives the PBoC large foreign reserves; and very low levels of public debt [estimated at ~25%].

The sticker rate, however, ignores local government liabilities, which are a major source of infrastructure financing. “Local Financing Platforms” (地方融资平台) borrow from banks, and provincial / local government bureaus are ultimately liable. Provincial governments have begun to issue bonds through the central government, but the amount as of yet is miniscule compared to the amount of bank borrowing. Several reports; see here (Economic Observer), here (Jinan Daily, Chinese), here (FT China Confidential) and here (Xinhua, Chinese) have noted that the total amount of loans secured by local government bureaus is somewhere around Rmb6tr at the end of 2009. There is only reason to worry, however, if these liabilities turn sour, which many onlookers think is inevitable, citing the scale of credit expansion, and the notion that there cannot possibly be enough profitable investments left to make. This argument alone is dubious, though there is plenty of substantive evidence to worry about an increase in non-performing loans. For example, the Nov. 23 Jinan daily article notes that there have been instances of Local Financing Platforms abusing their privileged position (and lack of transparency among banks) to illegally obtain credit, effectively double counting infrastructure financing needs on a variety of projects:

Since the beginning of this year, rapid increases in loans have become a common phenomenon. For some, this is taken as proof of economic growth. However, in fact, what if it is really true? Local government investment platform business loans have become the main form [of this trend]. Regional and commercial banks have utmost confidence in local governments, but in practice the survey conducted demonstrated that, there are still a number of local financing platforms that just want to improve their own conditions, and exploit the opaqueness of information between banks to expand their position, to illegally obtain credit, harming banks’ interests.

These types of illegal activities are broadly of several types: the first is exploiting financing offered by numerous banks [simultaneously], illegally obtaining credit. For example, a park environment renovation construction project in some city in Jiangsu province had a planned investment of about Rmb800mn, of which nearly Rmb300mn was financed directly by the investment platform. For the first half of 2009 this company applied for a Rmb500mn project loan, and at the same time, used the same project to apply for another Rmb200mn in a revolving financing loan from a completely different set of banks. Though project financing relies on bank loans for efficacy, this is true in name only.

今年以来，城商行贷款激增成为一个普遍现象。这曾被一些舆论一度视为经济增长的有力佐证。但是，事实果真如此？通过地方政府融资平台公司贷款，是目前政府类贷款的主要表现形式。尽管城商行对地方政府高度信任，但实际调查显示，仍然有一些政府融资平台公司为了达到自身运作目的，利用与银行之间信息不透明的可乘之机或自身强势地位，违规侵占信贷资金，损害银行利益。

而这些违规现象基本有以下几类：一是利用一个项目向多家银行融资，套取信贷资金。如江苏某市的一个园林环境整治建设项目，计划总投资约8亿元，其中有近3亿元自筹。该公司2009年上半年在向某城商行分行申请到5亿元项目贷款的同时，又以同一项目向当地另一股份制银行分支机构申请到2亿元流动资金贷款，建设资金基本依赖银行，项目资本金有名无实。

So the banks will be left holding the Asian-manpurse-satchel; who cares, since Chinese banks are also normally cited as being well capitalized. Non-performing loans made earlier in the decade were swapped by state established Asset Management Companies in 2003 that issued bonds to the banks at par for the non-performing loans, guaranteed by the PBoC and Ministry of Finance (worth about Rmb1.8tr), thus removing bad loans from bank balance sheets. If more NPLs ensue as a result of the behavior described above, banks may be left with an unexpectedly large losses. Recently CBRC mandated a slightly higher capital reserve ratio, but not by as much as was rumored. Still, banks have had to go back to raising more funds for continued loans (more here and here, in Chinese). Reuters ran a similar article yesterday.

Taking these together, Pivot Capital estimates that China’s public debt is somewhere in the neighborhood of 62%, much more comparable to international standards. China certainly does have more wiggle room for its size than many Western nations, and could probably continue to float Rmb bonds for a while if it needed to; but it’s total capacity to continue to expand fiscal stimulus type measures may be more limited than is commonly thought. Thanks to JG for pointers to many of the above links.

I’m fairly certain we lived through an instance of shady infrastructure financing last year. In Wuchang, there is an intersection known as 街道口, where highway construction was halted for over a year due to protestations by Wuhan University’s President, who holds a party rank equal to the city governor, since the highway was going to go right through the university (rather, ‘over’ a part of it). The intersection in question would have benefited from an overpass, a four-lane highway seemed like overkill. Maria details the event here. As a result of the stalled installation, one of Wuchang’s busiest intersections was perpetually jammed, from about 7am-7pm. A friend likened it to a “giant idle gas belching urban gash.”