The Chinese local Black Swan

China real estate

Accountants rarely speak out so frankly, and China isn’t exactly a place known for its transparency exercises–or from which markets are accustomed to receive news of self-criticism. So when senior auditor Zhang Ke this week said that Chinese local authorities’s debt is “out of control”, European analysts were in for a bit of a shock.

The data are unnerving, as a matter of fact. Village councils, counties, provinces and cities were officially banned from issuing debt in China before 2008, but they found a way around the law by setting up public companies that do sell bonds and lend. According to estimates now out there, the size of what is owed could reach up to $3.2 trillion or $1.6 trillion at best. These figures are equivalent to between 20 percent to 40 percent of the country’s GDP. No yet scared? Perhaps we should be.

Zhang, who works at accounting firm ShineWing and is vice-chairman of the national accounting association, put it in terms of almost global Armageddon as he described the consequences of a possible breakdown like a bigger financial crisis than the one caused by the US housing market crash. These debts, he explained, belong mostly to the category of infrastructure investment and returns so far fall too short to ensure that they will be repaid. The situation is made worse in a process not unfamiliar to European ears: debts need refinancing again and again without ever improving the chances of being cut down to sustainable proportions.

On April 9, Fitch Ratings became the first risk agency since 1999 to downgrade China’s long-term debt in local currency to A+ from AA-, arguing that private sector liabilities (of over 198 percent) could force a government bail-out and deteriorate state finances. On April 16, it was Moody’s’ turn to change its perspective on China to neutral from positive.

The country’s GDP in the first quarter of this year slightly disappointed market expectations of 8 percent with a 7.7 percent. What’s going on in China? In Madrid, Bankinter issued a note to investors that sums it up: “there are three different asset bubbles looming over the Chinese economy in the housing sector, stocks and credit.”

About the Author

Victor Jimenez
London contributor at, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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