Bloomberg just came out with a report that China is going to nullify financing guarantees by local governments. As an investor, that gets my attention straight away.
Another Keynesian Disaster? Maybe or maybe not if China’s new conservative fiscally responsible thinking is more than just rhetoric. China tried the stimulus idea that has been sweeping the west. Even though John Maynard in the long run is dead, his ideas persist like ants at a Sunday picnic. China pushed off its ‘stimulus’ funding to the local governments. The local governments are generating so much debt that the Chinese Ministry of Finance is banning all future loan guarantees.
Even a few of the local governments may have debt ratios that already exceed 400 percent according to one unnamed source. China’s banks created 9.59 trillion yuan in new loans last year. China has the world’s third-largest economy. The credit binge sparked concern about more bad loans and asset bubbles.
So what is China really doing by not ‘guaranteeing’ future loans by local governments? I think they are making the local governments wake up and smell the coffee about debt levels. Future funding will be at a premium and with come with some risk to the banks. This is a return to a free market approach and away from wild stimulus spending. Bad debt exposure will be one everyone’s minds.
“By striking the fear of God into lenders, regulators hope to get them to turn off the tap,” said Patrick Chovanec, a professor at Tsinghua University in Beijing. “Banks have lent on the assumption that a lot of these infrastructure projects are risk-free, but many had no creditworthiness beside the guarantees.” – Source: Patrick Chovanec’s Blog
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