This is the millionaire debt China was hiding since 2008

Sofía Carreño October 18, 2018

47 2 minutes read

China would be advancing infrastructure projects with unsustainable loans, they never declared this debt and now represents 60% of Chinese GDP

According to the financial services company S & P Global Ratings, local governments in China that obtained large loans after the 2008 financial crisis may have accumulated up to 40 trillion yuan (5.8 trillion USD), or even more, in undeclared debt.

Leer en español: La millonaria deuda que China le escondía al mundo

In a report published by the company last Tuesday, Gloria Lu and other analysts pointed out that "the potential amount of debt is an iceberg with titanic credit risks". Likewise, they reported that most of the accumulation of debt is related to the local government financing vehicles (LGFV).

LGFV are entities created by local governments to raise funds mainly directed towards infrastructure and real estate development projects. According to the International Business Times, these entities were created in response to the ban on Chinese local governments to borrow money directly. Thus, LGFVs can raise funds through bank loans, bond issues, public offerings in the stock market and fiduciary loans.

This model was criticized after the global financial crisis in 2008, as many of the loans obtained by the LGFV were poorly supported and the project's cash flow estimates were exaggerated. The concern about LGFV increased again in 2012 when new loans were approved for infrastructure projects. At that point, economist Zhiwei Zhang already warned for the International Business Times that "Dangerously, LGFVs are increasingly dependent on new debt to finance long-term investments." And this month, the bubble exploded.

Without state funding, LGFVs sought resources elsewhere

According to S & P, the Chinese authorities have watched over the reduction of the financing of the national economy, however, the quota established in Beijing for the issuance of bonds for local governments is insufficient for the financing of infrastructure projects that support the rates of regional growth. "That left the LGFV walking the tightrope between deleveraging and transforming their businesses IGNORE INTO more typical state-owned companies," S & P analysts said.

Likewise, the chief economist of China at Citigroup Hong Kong, Liu Li-Gang, stated that "From our point of view, the markets are right to feel more concerned about the sustainability of China's debt and the increase in financial risks" and noted that the pressure on the yuan is increasing, due to the fact that, according to China Economic Review, the debt accumulated in local government financing vehicles accounted for 60% of Chinese GDP for the beginning of this year, which increased the possibility of widespread defaults in companies linked to regional governments.

Similarly, S & P analyst Richard Langber said that "This alarming rate could pose greater threats to the financial system if a critical mass of LGFV is in default." For their part, analysts Gloria Lu and Laura Li, also of S & P, affirm that what LGFVs have caused in China with their undeclared debt is a 'debt iceberg with titanic risks' suggesting that for this and many other reasons. The next financial crisis may have originated in the second largest economy in the world.

LatinAmerican Post | Sofía Carreño

Translated from "China estaba escondiendo 5,8 billones de dólares en deuda"