Last year, collapsing Chinese industries were bringing light to what appeared to be China's bad debt nightmare.
The implosion of Suntech Power Holdings and China's decision to split the Ministry of Railways (MoR) and transfer all its debt to a state owned enterprise have once again raised questions about government debt.
We have previously reported on how local governments were underplaying the bad debt problem and actually making it worse by plying "zombie companies" with more cash.
First, in doing so, the government has made sure the bond market has had no defaults, but countered efforts to "develop a functional bond market." From Societe Generale's Wei Yao:
"In light of these developments, it could be said that all the debt of the state-owned or state-holding enterprises, which stands at about 100% of GDP, should have been included in the calculation of the government’s liability. Furthermore, the debt of private companies deemed too big to fail in certain local economies may have been included as well.
"Nevertheless, we see this opaque debt ownership more as a medium-term uncertainty rather than posing imminent financial or sovereign risk. No clear debt ownership means no straightforward mechanism to resolve potential debt default. Such uncertainty usually leads to either complacency or panic in the financial markets."
Second, and more worrisome is the impact this has had on the local government debt burden which has increased to about 17 - 18 trillion yuan.
Local government debt can be traced through 1. Bond issuance 2. Bank loans by local government financing vehicles (LGFV). 3. LGFV bond issuance. 4. Trust financing. Here's the breakdown from SocGen:
While the recent rise land prices could ease pressure on the local government, the recent property curbs announced by the government could "darken the outlook" in the second half of the year, according to Yao. And this in turn could impact troubled companies.
"These measures together with more restrictions on financing mean that 2013 is unlikely to be an easy year for local governments or infrastructure financing," writes Yao. "If local governments have a hard time covering their own financing needs, the possibility of them letting go of troubled corporates will rise. We will look for signs of stress in the domestic bond market as well as trust products."
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