China’s Banks In Trouble

9 Mar

From Bloomberg:

China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.

China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on local-government borrowing, estimated at about 24 trillion yuan ($3.5 trillion) by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad loans as projects are left without funding, Shih said this month.

“Beijing’s fiscal situation probably isn’t as good as it looks at first glance,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong. “Perhaps at some stage the central government is going to have to bail out the banks or the regional governments and take it on its own balance sheet.”

Premier Wen Jiabao recently warned of ‘latent risk’ in China’s banking system due to the massive speculative loans taken on by local governments in China.

Warnings of an inevitable crash in China’s real estate market have been growing louder, with former chief economist for the IMF, Ken Rogoff, predicting that China’s property market is in a speculative bubble that will burst ‘within 10 years’, triggering a regional recession.

In Australia, our economic authorities such as RBA Governor Glenn Stevens, and Treasury Secretary Ken Henry, are banking on a China-fueled multi-decade mining boom to carry Australia out of debt.

They both failed to predict the GFC.  It seems they still cannot see, or will not hear, the warning signals today.

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