China government debt at US$2.78 trillion as China Moves to Restructure and Manage the Debt

1. Economic Times of India – China may be sitting on world’s highest foreign exchange reserves of about USD 3.20 trillion but it is also burdened with USD 2.78 trillion government debt causing great deal of concern among policy makers.

China’s government debt amounts to about 17.5 trillion yuan (USD 2.78 trillion) about 43 per cent of the country’s gross domestic product ( GDP), Yang Kaisheng, president of the Industrial and Commercial Bank of China, said today.

It is composed of 10.7 trillion yuan (USD 1.7 trillion) of local government debt and 6.8 trillion yuan of central government debt

2. China has told its banks to start a huge roll-over of loans to local governments, the Financial Times reported, aiming to give itself more time to deal with a $1.7 trillion debt hangover from the global financial crisis.

As early as June 2011, the Chinese government had vowed to clean up its local debt either by shifting 2-3 trillion yuan of debt off local governments, forcing state banks to take some bad debt losses and selling select projects to private investors, sources told Reuters earlier.

Analysts say Chinese banks are already rolling over or restructuring troubled loans to cash-strapped local governments unable to repay their debt. But the amount of loans being rolled over is not known as banks — and Beijing — are tight-lipped.

Worse, analysts say Chinese banks are hiding troubled loans by adamantly refusing to mark them as non-performing loans in financial statements before restructuring them, as per global best practice.

“This is bad regulation but I don’t think we are going to get a bank crisis,” said a bank analyst in Hong Kong.

In some cases, loans are being restructured by extending their maturities by as much as four years, the Financial Times said, citing bankers and analysts familiar with the matter.

Not all local government loans would be rolled over, the paper said, citing a person with knowledge of the plan.

Banks would determine if there was real demand for the investment. Continued funding for the construction of highways would be approved but less important projects, like massive city squares, might be cut off.

Banks would also consider whether investments were consistent with the government’s five-year plan for industrial upgrading and cleaner growth.

China has said that about half of the 10.7 trillion yuan of loans will mature over the next three years.

3. Reuters – China orders local governments to set up debt repayment funds.

China’s local governments should set up special funds to repay some of the 10.7 trillion yuan ($1.7 trillion) debt they owe and must use all their fiscal resources to do a “good job” in paying their creditors, Finance Minister Xie Xuren said on Tuesday

Although China’s local debt woes have festered for over a year, Beijing has offered few details on the extent of the problem or possible solutions.

The lack of information led some analysts to guess at least a fifth of loans, worth 2-3 trillion yuan, have gone bad. They say that could cause banks’ non-performing loan ratios to more than quadruple to about 5 percent.

But the head of China’s biggest bank said on Tuesday that the lion’s share of its local government loans are doing well and are backed by adequate cash flows.

Analysts expect state banks will roll over much of what is owed by local governments rather than report them as sour loans on their balance sheets.

HSBC estimates China’s debt burden is still manageable at 55 percent of GDP, but says the rub is in the cash shortage faced by local governments that could cause “a major bank default”.

Faster privatisation would save banks from bad loans that can easily quintuple or more, analysts say.

On fiscal policy, Xie said China would focus on improving its tax system and lowering structural taxes this year. He added China was still studying ways on how to expand a pilot property tax on luxury homes.

Chinese leaders say they want to improve the country’s tax system to lower the tax burden on smaller companies and help them cope with rising operating costs.

To reduce the need for local Chinese governments to borrow heavily in future, analysts say Beijing also needs to give them a bigger share of state revenues as part of a wider reform of the fiscal system.

4. Bloomberg – China’s Premier Wen Jiabao announced plans to increase local-government bond sales by 25 percent this year to expand home building, as regulators “clean up” finances of indebted regional authorities.

The Ministry of Finance plans to sell 250 billion yuan ($39.6 billion) of notes on behalf of local governments this year from 200 billion in 2010 and 2011, according to its 2012 budget presented to the National People’s Congress in Beijing today. The increase was required mainly for low-income housing and public-welfare projects, it said.

Wen announced last year a program to build 36 million low- cost homes by 2015 to address a widening income gap and public discontent over soaring property prices. The government will run a budget deficit of 800 billion yuan this year, or 1.5 percent of GDP, he said.

“It’s quite a neutral budget,” said Lan Shen, an economist in Shanghai at Standard Chartered Plc. “A lot of activities are still taking place at local-government level and there’s still space for expansionary policy if needed, maybe in the second half.”

The deficit compares with last year’s target of 900 billion yuan, or 2 percent of GDP, and the actual deficit of 850 billion yuan, a figure altered by the use of a so-called budget stabilization fund and shifting some local-government spending, according to the speech. The Ministry of Finance in January gave preliminary budget data indicating a 2011 deficit of 519 billion yuan, or 1.1 percent of GDP.

5. Michael Pettis provided his take and feels that China will not reform or adjust fast enough and will not make the politically tough changes.

Nextbigfuture’s take-

It seems that China’s debt levels are at a manageable level and rolling it over at $300-500 billion per year seems feasible.

Recently (MSNBC) China’s central bank announced it would lower banks’ reserve requirement ratio (RRR), underscoring efforts to ease short-term credit crunch and secure growth.

The cut was the second of its kind in three months. As RRR dropped by 50 basis points to 20.5 percent for large commercial banks and 17 percent for mid- and small-sized banks, it unleashed almost $65 billion in capital into the market.

So if China eased reserve requirements by ten times as much that would put about $650 billion of capital into the market.

Most countries have reserve requirements of less than 10% (per wikipedia

The United States has about 123% of GDP total local, state and federal debt. 104% federal debt, 11% local debt and 7.0% state debt.

EU state, local and national debt by country in 2010

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