One China’s local government: “Lend me the money, or your career will be at a standstill”20 April, 2012, 13:58. Posted by Zarathustra
Tags: Debts, LGFVs
I have been talking about the large but unknown amount of debts that exist in China. Yesterday I briefly touched on how real estate developers got financing from so-called private equities, which were largely loan sharks in disguise. For the past year or more, I have also been highlighting the risks that the local government debts problems could have been hugely underestimated by the consensus.
Debts always appear less of a problem when the economy is doing well and asset prices are rising. It is when things are going the other way that what seemed to be a small issue becomes a big problem. For real estate developers, the level of debts being accumulated over the past 2 or 3 years are starting to put much pressure on them as the real estate market cools, leading to bankruptcies, that I expect to spread. For local governments, what they have been investing in, financed by debts (via local government financing vehicles and others), are largely projects that have little or no return. Yes, these developers and local governments are borrowing money to build things, which generates GDP. However, with all those investments having no return (or even negative return, or assets they create decline in value), they are “burning” money, and bad debts have to increase on the other side, i.e. banks’ balance sheets.
Just how desperate are all these local governments in China are?
Sina reports a ridiculous story of teachers (and many others) in Liangshan, Shandong, are being asked (or forced) to buy a wealth management product issued by a trust, apparently (does it ring a bell?). The one-page document on this particular product (shall I call it a prospectus?) said the government is trying to raise RMB200 million, with a maturity of 3 years, and interest rate of 10%. The money being raised will be used for “urban construction”. One teacher said he was asked to invest in RMB10,000 of this thing, which is a huge amount for him (worth half a year of his salary). Other teachers and staff are being asked the same, and are being warned that they will have no chance of being promoted if they do not buy these products.
According to the report, Liangshan county government is not the only one which are trying to force people into lending money. Many other countries’ and cities’ local governments are doing similar things. Very desperate indeed.