As the Americans continue to crack their brains over their own economy that appears to teeter on the edge of another recession and debts and the forthcoming presidential election, and European leaders, with alms bowl in hand waiting for China’s to open her coffer, still pondering over their plans on how to save the Eurozone crisis, the Chinese government, which produced its first national audit of only 6,500 out of over tens of thousands of local government financing vehicles in June 2011, has admitted that local governments could owe as much as 30% of China’s GDP, which is a far cry from previous insistence from the Central Government that the government’s official debt load is less than 18% of GDP. However, some analysts are putting China’s real debt levels at three to four times those levels.
On the surface, the International Monetary Fund’s economists are still forecasting China’s growth rate to be over 9% this year as China continues to run huge trade surpluses. New construction starts have soared with a government campaign to tame the over-heated property market and to provide more affordable housing.
However, deeper inside, the country’s huge manufacturing sector is starting to slow and export orders are weakening. The real estate bubble is starting to spring leaks, even as inflation remains stubbornly high for consumers — despite a series of interest rate increases and ever-tighter limits on bank lending especially for property buyers.
China’s Debts – A Major Concern
Europe’s debt crisis, though still jitters, appears far less worrisome as markets have already priced in for adversities. But whether China can handle its debt woes is still debatable as any debt implosion in China would wreak far more damages than Europe Sovereign Debt Crisis since markets have yet to price in any damages arising from China’s debt or impending banking crisis.
One of the reasons is that no one knows exactly how indebted China really is since its government has not been very forthcoming with the official figures.
Huge loans that Chinese state-owned banks have made to state-owned enterprises and local governments over the past years, and especially the last three years, could cause trouble if the economy does slow.
But because China’s growth engine has been one of the few drivers of the global economy since the financial crisis of 2008, any signs of deceleration could add to worries to the already gloomy global outlook.
One method of gauging or estimating the size of China’s debts is to look at how government Ministries and local governments circumvent regulations to obtain finance that inevitably build up over time and becomes a burden for the Central Government on the whole.
The Ministry of Railways Debt
China Railways Ministry’s debt had increased at an average rate of 42% between 2008 and 2010 due to massive railway construction, and has piled up RMB 2.1 trillion worth of debts, which is 5% of GDP and 28% of the central government debt reported officially. The debt-to-asset ratio, standing at 58.5%, is fast approaching the 60% threshold above which companies are generally regarded as risky.
Markets have been relatively concerned regarding the ministry’s ability to repay its debt obligation especially after the train crash in July 2011. In the past three years, revenue grew at average rate of 14%, which is a far cry from that of the debt owing, with profits at an average growth of 3.5%. The huge amount of existing debt, and market concerns, has led to serious funding problems for the ministry, in terms of both bank loans and bonds.
On the one hand, there is a 60% total funding ceiling for the ministry’s bank loans. Outstanding loans of the ministry that are held by big four state-owned banks are estimated to be RMB 300bn. However, according to China Banking Regulatory Commission (CBRC), credit extended to one client group, including loans and bonds, should not exceed 15% of the bank’s capital. There was a rumor that all the “Big Four” banks had reached their loan ceiling in May. Hence, the upside for additional borrowing from banks is quite limited.
On the other hand, the outlook for issuing bonds is also gloomy. To understand this, we need to take a deep look at the ministry’s activities in the bond market. Ironically, with its obsolete system, the ministry is a pioneer in experimenting new products in the bond market with RMB 65 billion super & short-term commercial papers, and RMB 5 billion debts through private placement.
Andrew Michael Teo 