According to a report from the Wall Street Journal,China's local government debt problems are growing.
Local government debts have risen imprudently fast and reflect deep structural issues that will make it difficult for the economy to grow as quickly as Beijing wants. Banks and other lenders are stuffed with short duration loans to beleaguered local governments that fund questionable infrastructure or projects that have a payback only after decades. Moody's survey found that only around half of local government financing vehicles had the cash needed to meet debt payments this year. Yet defaults are rare, as lenders rollover loans.
Of course, China's ample domestic savings means a serious debt crisis isn't imminent. And reforms outlined at the recent Communist Party congress to boost local governments' tax revenue and budgeting transparency will improve the situation over the long term.
Meanwhile, however, the most likely scenario is for lenders to continue forbearing. More than 20% of the local government debt counted in the audit came due this year. Another 40% is due in the next two years. Rolling debt has costs: It weighs bank balance sheets with unproductive lending and creates moral hazard as debtors are spared the consequences of poor decisions. Ultimately, either the central government steps in with a bailout, or banks and shadow lenders will have to write down the bad debts.
For such an important aspect of the economy, investors should get more than a sporadic audit of local government debts every couple of years.
