Local Debt Danger: Chinese Reform Still Bumpy


China has been working on transition its nation economically through a radical reform plan. The change in fiscal policy has been accompanied by attempts to reduce local debt, and the central bank making efforts to keep things somewhat predictable despite reforms.

China’s local government debt hit a precariously high level of 17.9 trillion yuan — about $2.95 trillion — near the end of June of 2013, according to Reuters. This ends up putting the total national debt of China at 218 percent of its Gross Domestic Product. That’s an increase of 87 percentage points since 2008, according to Reuters reports of a rating agency’s estimates. While this may not be so high compared to other nations such as Japan and the United States, China’s economy is more ill equipped to deal with the stress of such a high debt load.

“One can predict that growth of total social financing will slow and fixed-asset investment will also slow. If this isn’t accompanied by various forms of debt restructuring, some sectors may see their funding chains broken and there could be defaults,” said Liu Yuhui, a director at the Chinese Academy of Social Sciences, to Reuters.

One contributing issue behind the local debt is the shadow loans that banks have been making. Reuters reports that a large number of these shadow loans are made via wealth management products, also known as WMPs. When the WMPs mature, banks may be too dependent on other bank loans to pay up.

“In the last year, banks have been hit hard by liquidity problems,” Liu told Reuters. “Quite a few banks wish the central bank would relax liquidity, but based on Document 107, it appears the relevant authorities don’t agree.” The rules and regulations governing shadow loans are rather general, and as such are not as tailored as many believe is necessary to regulate these issues.