More signs of China’s ballooning bubble.
From the Bloomberg,
A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hour’s train ride from Beijing. And like New York City in the 1970s, it may need a bailout.
Debt accumulated by companies financing local governments such as Tianjin, home to the New York lookalike project, is rising, a survey of Chinese-language bond prospectuses issued this year indicates. It also suggests the total owed by all such entities likely dwarfs the count by China’s national auditor and figures disclosed by banks.
Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund.
There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 trillion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt.
The fact so few of the companies have accumulated that much debt suggests a bigger problem, says Fraser Howie, the Singapore-based managing director of CLSA Asia-Pacific Markets who has written two books on China’s financial system.
“You should be more worried than you think,” he said of Bloomberg’s findings. “Certainly more worried than the banks will tell you.
“You know how this story ends -- badly,” he said.
The boom from opening up of China’s economy is one thing, but a boom fuelled by government intervention is another—they are artificial and spent on projects fancied by politicians and not by the marketplace.
More from the same article,
A building boom by thousands of local governments became the backbone of the country’s stimulus program started in November 2008 -- on borrowed money. The financing companies were created starting in the 1990s and enabled provinces, cities, counties and townships to bypass rules barring most of them from directly selling bonds.
Projects undertaken include a stadium, which resembles Beijing’s iconic Bird’s Nest Olympic venue, in Jinan, the capital of eastern China’s Shandong province; and a superhighway in the country’s second-poorest province of Yunnan that stretches into the foothills of the Himalayas, where there are no cities of more than 1 million people.
China has been reversing the sustainable boom from burgeoning entrepreneurship paradigm, by transferring and squandering taxpayers money and reversing the entrepreneurship role for political goals—the preservation of the status quo for the political leadership.
Nevertheless delusions of grandeur projects represent as commonplace indicators of bubble cycles.
Austrian economists label this as the ‘skyscraper index’.
As Professor Mark Thornton writes
the cause of skyscrapers reaching new heights and severe business cycles are related to instability in debt financing and that the institutions that regulate debt financing should be reevaluated, if not replaced with more efficient and stabilizing institutions.
And yes I agree, this story ends—badly.
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