The Trillion Dollar Question: China’s Local Government Debts Mystery Revealed2 June, 2011, 3:23. Posted by Zarathustra
Tags: Debts, Economy, Local government
The People’s Bank of China just published a bunch of numbers on the “2010 China Regional Financial Operation Report”. Of particular interest is the loans to the so-called “local government financing vehicles (LGFVs)”, which are largely used by local governments to finance their various projects. After the financial crisis, debts to these LGFVs exploded, causing some great concerns on how much of these debts will ultimately turn bad, and its implications to the Chinese economy.
Yesterday, we have already had the report that the Chinese regulators will clean up these debts by shifting some of them off the local government’s balance sheet into separated asset management companies. State-owned banks will also be required to write-off some of these bad debts. Of course, the ultimate question of who pay the final bills are un-resolved.
Today report by the People’s Bank of China contain some brief analysis on the LGFVs debts. By the end of 2010, there were more than 10,000 LGFVs, increased by 25% from the end of 2008, although the growth rate has moderated in 2010 after the government realised that there was a problem. Of all those loans, more than half of them have the maturity of more than 5 years.
Now, here’s the trillion dollar question:
How much debts are there?
The PBOC’s latest analysis suggested that the LGFVs debts accounted for “no more than 30%” of total Yuan loans, with state-owned banks and policy banks as main sources of funding.
So how much?
According to the 2010 4th quarter Monetary Policy Report, total Chinese Yuan loans amounted to 47.9 trillion Yuan. So 30% of the total loans will be no more than 14.4 trillion. And it is fair to say that “No more than” can be taken as “equal to”.
To put the whole thing into perspective, we know that China is roughly a 40-trillion-Yuan economy. The central government has about 6 trillion of debts (15% of GDP). The Ministry of Railways now has about 2 trillion of debts (5% of GDP). The LGFVs debts roughly amount for 36% of GDP. From this old report by WSJ, they also added 13% of GDP from policy bank, 4% of GDP from asset management companies, and 1% of GDP of non-performing loans.
So using this very rough estimate of what we know, the debt burden of the public sector is 74% of GDP.
Quite a while ago, I have compiled a list of debt-to-GDP ratio among major developed countries using 2010 forecast by the IMF. If that’s still a reliable guide, the 74% debt-to-GDP ratio of China is coming quite close to United Kingdom.