The actual level of off-balance-sheet Chinese local government debt could be several times more than what is publicly disclosed and range as high as 30 trillion yuan to 40 trillion yuan, or about $4.34 trillion to $5.78 trillion, S&P Global Ratings analysts say in a report.
“That’s a debt iceberg with titanic credit risks,” the analysts say, estimating that the ratio of all government debt to GDP was 60 percent last year.
As a result, S&P Global Ratings expects authorities will allow more defaults in local government financing vehicles.
Economic conditions appear to be lining up to suggest a pretty hard landing. The property sector is a mess, state owned banks are bloated, inefficient and carry loads of non performing loans. Many in the investment community are becoming of the opinion China’s official GDP numbers have been exaggerated for a long time. If this is true that means between the shadow lending, shady state borrowing and other debts the country could be in for a serious economic crises unless something changes fast. It’s successfully avoided a recession for 30+ years but that also means that structural imbalances within the economy have likely gotten worse, but have been successfully masked by stimulus spending.
The challenge with China is that economic and political stability go hand in hand, if the government fucks the economy up it could be very dangerous for stability.
The CPC has been very successful thus far in keeping growth strong, but that becomes more and more difficult as the economy grows/matures. So far they’ve successfully masked systemic weaknesses in the economy using various stimulus methods to keep the country out of recession for 30+ years, but again you can only do that for so long. Eventually these issues come to roost. The economy was going through a relatively successful deleveraging campaign over the past few years but since trade tensions with the US have spiked its undone most of that already.
The more time that goes by the worse these imbalances in the economy become, the bigger the imbalances the worse the eventual correction will be. It can’t be avoided forever.