China: Understanding The Nature Of The Bubble [View article]
Interesting article.
Chinese consumers are not over extended but local governments are because they have few means to raise revenues other than the sale of land because they may not issue bonds and have restricted powers of taxation.
Thus, they have turn to the sale of real estate to expand revenue through the creation of thousands of SPV to finance land sales in which municipalities retain interest and financial exposure. Some or many of these projects may be fairly characterized as bridges to nowhere or white elephants, bringing into question there long term viability.
Reuters recently published a piece in which they reported that "local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered reckons as much as 8 to 9 trillion yuan will not be repaid -- or about $1.2 trillion to $1.4 trillion."
Much of this development has fueled economic growth and while China has close to $3 trillion in reserves, this remains a serious problem for the country as it could retard future growth and call into question banking system solvency.
China: Understanding The Nature Of The Bubble [View article]
Chinese consumers are not over extended but local governments are because they have few means to raise revenues other than the sale of land because they may not issue bonds and have restricted powers of taxation.
Thus, they have turn to the sale of real estate to expand revenue through the creation of thousands of SPV to finance land sales in which municipalities retain interest and financial exposure. Some or many of these projects may be fairly characterized as bridges to nowhere or white elephants, bringing into question there long term viability.
Reuters recently published a piece in which they reported that "local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered reckons as much as 8 to 9 trillion yuan will not be repaid -- or about $1.2 trillion to $1.4 trillion."
Much of this development has fueled economic growth and while China has close to $3 trillion in reserves, this remains a serious problem for the country as it could retard future growth and call into question banking system solvency.