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Government Report Reveals China Debt Bomb

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The Hang Seng Index graph outside a bank in Hong Kong on Aug. 25, 2011. A new report from a Chinese regime think tank reveals that China has debt problems. (Laurent Fievet/AFP/Getty Images)

Debt-crippled Western nations who have hopes that China will rescue them should think again: a new report from a Chinese regime think tank reveals that China has debt problems of its own.

The State Council Development Research Center’s (DRC) Oct. 22 report, “Research on China’s Financial Risks,” shows the combined central and local government debt at 23.76 trillion yuan ($3.8 trillion), or 59 percent of 2010 GDP. While this number is lower than most Western governments, it is the distribution that is most troubling.

Local governments’ short term debt is the most critical, with the highest potential for a financial blow up. In fact, the debt is so high that 78 cities and 99 counties would need to allocate 100 percent of their budget to service it.

A $640 billion central government stimulus plan enabled local governments to borrow heavily in 2009, in the wake of the global 2008 financial crisis. In order to borrow from banks, local governments set up special financial entities that carried out local infrastructure projects, mostly highways and airports.

According to the DRC report, 42 percent of these local debts mature at the end of 2012 and 53 percent by the end of 2013. The report examined 1734 of the special entities and found that more than 26 percent of them are losing money.

Since many local governments are experiencing difficulties in paying the interest on their loans, the probability is low that they will retire the debt on time. Many of the projects aren’t generating enough cash to service the debts, so some local governments have taken on new loans to retire old ones, compounding the problem.

It is very likely that the China Banking Regulatory Commission (CBRC) will be forced to introduce a new policy, extending the deadline for entities that cannot pay back the debt, according to the National Audit Office.

There is no sign that investment activity is leveling off, however. On the contrary, it is increasing. Because officials’ performance is measured by how much they boost the GDP, the incentive is high for them to overspend in order to create a track record of political achievement, leaving the debt for the next generation.

Wu Jinglian, a well-known Chinese financial scholar and State Council expert, points out that the current investment plan presented by local governments has reached 17 trillion RMB ($2.72 trillion). Addressing the 2012 International Financial Forum, he warned that the Chinese regime’s current economic growth stimulus plans are not sustainable, and will create dire consequences if deployed, as this paper reported in a Sept. 19 article.

Speaking in a closed door forum in Shenyang, Liaoning Province, in October 2011, economic scholar Larry Lang predicted that the local debt would cause an economic tsunami, as The Epoch Times earlier reported.

He warned: “Every province in China is Greece. All levels of government will go bankrupt in all aspects.”

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