China’s local govt debt sparks fears of Lehman-style collapse

April 19, 2014 Leave a comment

China’s local govt debt sparks fears of Lehman-style collapse

Staff Reporter

2014-04-13

China’s snowballing local government debt has investors concerned about a Lehman Brothers-style collapse triggering a new financial crisis, reports our Chinese-language sister paper Want Daily.

Apart from major cities such as Shanghai, local governments in China are in principle not permitted to issue local government debt. But economic difficulties have led to many local governments issuing “urban investment debt” through their state-owned enterprises for infrastructure development.

According to statistics from the International Monetary Fund, China’s urban investment debt has escalated to a level equal to 26% of the country’s GDP and continues to grow at an alarming rate.

Last month, Shanghai Chaori Solar Energy Science & Technology became the first company to default in China’s onshore bond market when it failed to make a full coupon payment. The medium-sized building-materials maker Xuzhou Zhongsen Tonghao New Board also barely avoided default, while China Credit Trust and Baoding Tianwei Baobian Electric are said to be in serious trouble.

The financial research center of China’s Bank of Communications says the situation will continue to worsen as the country’s urban investment debt faces 350 billion yuan (US$56.3 billion) of repayments in 2014, with the first major wave of payments due this month.

Sun Binbin, an analyst at China Merchants Securities, says seven-year bonds will also mature soon, bringing systemic risk to dangerous levels and could bring China’s local government debt to the verge of collapse.

Local governments have already said that they will not guarantee loan repayment by their state-owned enterprises. For example, the 1999 bankruptcy of state-owned Guangdong International Trust and Investment Corporation, one of the biggest in Chinese history, was not covered by the Guangdong provincial government.

The spiralling debt has investors and analysts concerned that China’s banking sector could be heading towards a collapse similar to that experienced by America’s Lehman brothers in 2008 which sparked a global financial crisis.

 

Filed under Macro Trends

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