China has at least 36 local governments with as much debt, on average, as Detroit

China has at least 36 local governments with as much debt, on average, as Detroit

By Jake Maxwell Watts @jmwatts_ 4 hours ago

China’s National Audit Office announced on Sunday that it is conducting a comprehensive review of all local government debt, which has long been considered a potential time bomb that threatens for China’s economy. But how bad is the debt really? An audit that took a sample of 36 local governments at the end of 2012 (15 provinces, their capital cities, the municipalities of Tianjin, Shanghai and Guangzhou, and one district from each municipal city) found that those authorities had taken on a total of 3.85 trillion yuan ($628 billion) in debt, up 12.9% from 2010. That works out to $17.4 billion each—just under the $18 billion in debt held by the US city of Detroit, which filed for bankruptcy earlier this month.It’s not an arbitrary comparison: Detroit’s bankruptcy has been cited a wake-up callfor Beijing to rein in local government debt before it’s too late. Of the 223 recently audited local government financing vehicles in China, some 80% had either made a loss or not enough profit to cover their interest payments.

Of course, Detroit versus Chinese local government isn’t exactly apples to apples: A shrinking population has left Detroit with only about 700,000 people within its borders—a drop in the bucket for major Chinese municipalities. Tianjin, for example, has a population of 13.55 million. Assuming it has an average $17.4 billion in debrt, that works out to $1,284 of debt per resident, compared to $25,714 in Detroit.

But there are also some striking parallels: Detroit was a modern American boomtown that drew in hundreds of thousands of migrants from the rural south to serve as cheap labor for a boom in industrial manufacturing, giving birth to a huge middle class that was prosperous for decades.

China’s cities are only part way through that cycle—millions of rural poor have migrated to the cities in search of work in the factories, but creating middle-class consumers has proven to be more difficult. In the absence of that transition, local governments have been unable to wean themselves off a relentless cycle of credit-driven growth, producing a mountain of debt. Jiangsu province, north of Shanghai, has been cited as one of the most vulnerable as its investments in shipbuilding and solar panels feel the bite of economic slowdown.

Detroit has thousands of abandoned homes and buildingsChina has ghost malls. Now China’s audit office will find out just how similar their situations really are.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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