PRC Economy - New Reflections : Dec 15 2011

[pankajs]

The penny drops – finally – on China’s economy - FT

Analysts who visit Beijing and Shanghai tend to come back having seen little evidence of China’s lost decade in the making (all credit bubbles are followed by credit busts and years of deleveraging). But venture further, as Ann Stevenson-Yang of J Capital Research does, and it’s definitely there. In recent research she looked at retail sales. She didn’t get the answers the optimists might have liked. Instead she found everyone from luxury to mid-range footwear retailers saying that their revenues were down 15-20 per cent year-on-year.

There are bright spots of course. One is rising auto sales. However delve a little deeper and you will see that this is less about rebalancing to consumption than the “crack of credit.” Everyone’s offering 0 per cent financing now and in some cases buyers end up with their car for free. How? The buyer pays for the car but with the guarantee of the money back in two years. The seller invests the money in the shadow banking system where he hopes for returns of 60 per cent a year or so before selling up and giving it back. Not bad. But as Stevenson-Yang notes, in the past this kind of thing has “not ended well.” If you are getting 60 per cent on your money (or even hoping to) you are not in an investment but in a pyramid scheme of one kind of another. And if you live in a country where any meaningful part of growth is built on such pyramid schemes you are living on the edge of a crisis.

[Christopher Sidor]

Well not exactly wong. When we were independent the Britishers said we would not be able to hold the country together. There is too much of internal division. They said that Pakistan would come on top due to its cohesion. Look at how it has turned out. And I will hold it to you. Shall we have two bets?
1) Does India have a civil war in less than 25 year? I say no. What do you say?
2) Can PRC and consequently CPC survive zero growth rate or negative falling rates without sending in the tanks or troops?

If you win I pay 100 Rupees to the charity of your choice. I will leave it upto you to decide what you will give in case I win.

We have gone through very low or negative growth rate, 1989-91. But guess what we did not have to crush people under tanks. So we have shown the ability to survive without the upheaval.

Our PM has said that we have an insurgency going on in vast parts of India's hinterland. Our biggest Internal threat. But inspite of so called internal threats we grew. About 5% with max growth in excess of 10% in 1980s. In 1990s with an average growth of 6-7% and in the first decade of 2000s with an average growth of 8-9%. In 1980s we had the Khalistan insurgency and yet that did not dent our growth. In 1990s we had the Islamic Insurgency again that did not dent our growth. In 2000s we had the maoist insurgency and even that did not stall our growth.

But this is not about India this is about PRC what are the chances of PRC and CPC surviving a 3% or zero growth rate ?

Like Egypt, your country never had the restless unemployed youth population like you will have in the next 10 years. Good luck!! You're really going to need it while your economy tanks.

Unlike Egypt and china we are not a single person or party rule. So the analogy is mistaken. And yes we will have our youth bulge now at least till 2040. In this duration we will have a healthier ratio of retirees and earning members. Unlike the inverted pyramid of certain easy Asian nations. And thank you for your good luck. But you still have not answered my premise. Are you afraid that what we might be saying has some grain of truth in it.

[Christopher Sidor]

Only 1 year or 6 months ago, the main stream opinion on this forum is "China will collapse when its economy is below 8%".

Now it seems to become "3%". So you are becoming more and more optimistic on the Chinese governance?

The 8% was based on the number of new people joining the workforce. That is no longer going to happen. China simply does not have that many number of people joining the workforce. I have always wished best for PRC's economy. It is only the attached social costs that is a concern. Just see how Egypt has been reduced to begging international donors just because the leaders were too self centred.

[Christopher Sidor]

High-speed rail is at the foundation of China’s growth strategy

http://qz.com/116190/high-speed-rail-is ... -strategy/

Has China overinvested in high speed rail? Anecdotal stories of empty train stations (paywall) in far-off provinces have led some to conclude that high-speed rail is just another Chinese white elephant—an investment without a cause. But the recent experience with high-speed rail belies this narrative, and a closer look at the data reveals that high-speed rail has been, and is set to be, a vital part of China’s growth strategy.

Passenger rail has grown very quickly over the past decade. As seen above, from 2001 to 2011, national passenger turnover doubled. Yet this rise in demand has not been accompanied by a comparable increase in the length of railroad track. As a result, each kilometer of rail is now supporting more passengers. In other words, rail utilization has become more intense. In 2001, the average kilometer of rail supported 680 km (422 miles) of passenger travel. By 2011, this rose to 1,030 km, a 50% increase. This phenomenon has been going on across the country—particularly in the inland provinces. During the same time period, rail intensity in the frontier province of Qinhai increased by a factor of 2.5. In no other period of Chinese history has passenger rail demand been this strong.

Rail and passenger rail especially cannot be the driver of growth. See the case of Japan, which resulted in JR amassing a debt burden which it cannot pay inspite of such heavy usage. The sad fact is that rail is economical only when it is used to transport bulk commodities or bulk container traffic. The amortising, depreciation just do not add up. Yes there are some innovative uses of cargo transports especially like transporting trucks on flat bed containers, like it is done in Germany and other European nations.

[wong]

^^^^

"Rail and passenger rail especially cannot be the driver of growth."

That's actually not correct. Rail was a huge driver of the post Civil War American economy. Read the rest of the link. It gives many examples of HSR improving productivity, tourism, consumption and urbanization all of which will promote growth going forward. At 1.33 million riders per day and growing, HSR is clearly a success. Any comparisons with Japan is silly. Two totally different country and systems.

[wong]

Unlike Egypt and china we are not a single person or party rule. So the analogy is mistaken. And yes we will have our youth bulge now at least till 2040. In this duration we will have a healthier ratio of retirees and earning members. Unlike the inverted pyramid of certain easy Asian nations. And thank you for your good luck. But you still have not answered my premise. Are you afraid that what we might be saying has some grain of truth in it.

China survived massive state layoffs in the late 1990's and did just fine. China has always had social upheaval. Social upheavals that would break and destroy other countries and civilizations, China has survived them all. It was always the last one left standing. You made it through 65 years of independence. Good for you. China made it through at least 2,500 years. So no, I'm not afraid of your questions at all. I'm pretty sure the Chinese economy is on track and will pass the middle income trap.

Also, you guys have no problem calling the family that has ruled India since independence 'dynasty', but you still believe you don't have single man or party rule. China has been ruled by more unrelated people from different families in the last 65 years than your country.

[Suraj]

wong: Keep India out of this thread.

Way too much hyperbole. China's history is characterized by constant upheaval and overthrow of dynasties, invasion and the gain and loss of territory, with enormous bloodshed and brutality in the process. Continuity in the form of peaceful transfer of power AND cultural continuity does not exist - you had centuries of Mongol and then Manchu domination. China effectively repudiated its own culture in the 1960s, and no longer has a claim on its own history - Taiwan is the only remaining bastion of real historic Chinese culture. No need to jump in with 'Taiwan is China'. It's not. Different country, different culture, different politics.

China's communist polity may have been run by people of unrelated backgrounds. But their emphasis on retaining their power structure is far more solid than anything in any democratic framework, where any party is an election away from the opposition benches. A real democracy, not like Saddam getting 99.96% of the vote...

[zlin]

China grid says half of $100 bln high-voltage network under way


* State Grid says 8,734 km of lines still need full govt approval

* Says ultra-high voltage investment to reach $100 bln by 2017

* Believes technology to help meet China's energy plans

By David Stanway and Benjamin Kang Lim

BEIJING, Aug 21 (Reuters) - China is already building, or has approved, more than half of a $100 billion network of high-voltage power lines to connect remote energy producing regions to the east coast, a top official at the state grid firm told Reuters.

The project has been controversial with critics arguing the State Grid Corporation of China (SGCC), the world's biggest utility, is betting too much on costly and untested technology that could expose the system to black outs.

The state grid will spend 620 billion yuan ($100 billion) by 2017 on 20 ultra-high voltage (UHV) lines spanning nearly 20,000 km (12,000 miles), said Zhang Zhengling, deputy director of development and planning at the firm. Some analysts have previously put the cost of the upgrade as high as $250 billion.

Zhang said 4,633 km of the lines, which are designed to minimise energy loss during transmission, had been completed and another 6,400 km was now being built.

He said local governments had given the go-ahead for studies to be made for the remaining 8,734 km of the project ahead of approval by China's planning agency, the National Development and Reform Commission (NDRC).

SGCC has lobbied hard for approval but a source at the NDRC said last year that regulators remain cautious.

No one at the agency was available for comment, but Zhang Guobao, NDRC's former energy chief, said in a TV interview this month that a dispute over UHV "had not yet been settled".

Zhang said he believed the government had full confidence in UHV. The technology would help government efforts to commercialise energy sources in the northwest and southwest, as well as reduce environmental pressures along the industrialised eastern coast, he said.

"People say it is immature, and three years ago maybe they were right, but now it isn't really true -- our pilot project has been running for over four years without a single hitch."


Zhang rejected claims that UHV could raise blackout risks, saying the grid was designed to prevent outages. He also said reports suggesting the total cost of the project could be more than double SGCC's estimate were based on misunderstandings.



CURB ENERGY IMPORTS

The world's No. 2 economy has struggled to expand its grid to keep up with power demand growth, which has exceeded forecasts. Most of China's new energy supplies are located in the far west, while demand is in the east and south.

The UHV lines would allow China to build power plants near coal mines or gas fields before sending electricity rather than coal across country. This would free up rail capacity and could reduce the need for coal and gas imports.

By 2017, the company aims to connect 210 gigawatts of capacity in the west to markets in the east, triple the current rate and involving the transmission of 1.2 trillion kilowatt-hours of power a year across huge distances, Zhang said.

He said UHV could deliver four to five times more power than traditional power lines, and was also more reliable, with much less lost during transmission. The lines also required less space, a crucial advantage in China where land is scarce.

China's strategy aimed at improving air quality in the east involves constructing coal and power production bases in inland regions, delivering power instead of coal. With China also planning to cut coal use around Beijing, Shanghai and Guangdong, the onus will be on the grid to deliver more power, Zhang said.

He said UHV would allow China to take advantage of renewable energy sources in western regions like Yunnan and Tibet.

"Without UHV, renewables can't find a market. The local population cannot use that much power and it must be delivered through grids, and it is so far away that we can only use UHV." (Additional reporting by Coco Li; Editing by Ed Davies)

[pankajs]

Property Sales in Small Cities Pivotal to China's Growth - VOA/Reuters

BEIJING — A property glut in some smaller cities raises questions over how far China's decade-long housing boom can last at a time when the fragile economy is more vulnerable than ever to a possible retreat in the red-hot property market.

A flurry of housing investment over the past several years, fueled in part by herd-like speculative buying, resulted in some developers building more housing than could be sold once the market began to slow.

Now, the concern is that the market could be cooling too quickly, and risk stalling one of the few engines in the economy that are still firing.

“Dozens and dozens of small cities -- still home to the majority of China's urban population -- have more housing than they need,” wrote Rosealea Yao, a principal analyst at GaveKal Dragonomics, a Beijing consultancy, in a report. “This excessive supply will put a serious drag on national construction growth for several years.”

While Wenzhou's falling prices remain an exception, the city's plight and its move earlier this month to relax some the toughest property market curbs are emblematic of the growing concerns about China's slackening economic growth and the risks of cracking down too hard on the housing market.

China's leadership, acutely aware of housing's importance to the economy, appears to have set aside concerns that a property boom was pricing millions of families out of the market.

The stakes for Beijing are high. A slowdown in exports and fixed investment means the economy is more reliant on the residential property market than it was even a year ago.

Housing, moreover, props up at least 40 other sectors, from cement to steel to furniture and home appliances. Local governments also depend heavily on revenues from land sales to developers to help service a debt pile worth trillions of yuan.

[pankajs]

China's bloated economy needs a dose of reality - South China Morning post

While China's higher-than-expected July exports may fuel recovery hopes, it may be false optimism for a country that is finding itself in deep economic and social distress.
...
...

Unsustainable surges in real estate prices and local debts, along with growing concerns over the shadow banking system and worrisome declines in both export and import figures, suggest there is trouble ahead.

Financial markets, and all those with vested interests in the economy, fear that there are worrying similarities to the bubble economy that triggered the US crisis in 2008.

Recent data shows evidence of a growing bubble, although expansion rates are slowing. As the economy slows, and other industries weaken, investors seek out property investments for reasonable returns. Average home prices in China's 70 major cities rose 6.8 per cent in June from a year earlier. Sixty-three of the 70 cities saw month-on-month increases in home prices, versus 65 cities in May.

Moreover, the true extent to the housing bubble remains unclear; China began withholding nationwide home price data in 2011.

...
...

Li Zuojun, an economist who consults with various local governments, said in a 2011 speech that politics might have played a role in delaying the potential crisis. China's policymakers went all out to maintain stability during the once-in-a-decade leadership change.

With the change now complete, the new government has two alternatives. The first is to protect the bubble - but it may burst of its own accord by 2015 or 2016. Thus the price of less pain now may be greater pain in the future.

The second option is to pop the bubble. This may be the wise choice for the leadership.

First, it could build from the ground up; new ideas are founded on solid ground, not frothy, effervescent foam. Second, the new leaders could blame previous regimes; saying they needed to correct the mistakes.

China faces unprecedented challenges. If new leaders' policies prove to be inadequate, social unrest could erupt. Economically, the international outlook is not on China's side. We cannot expect China, while the global economic climate is still gloomy, to grow as fast as it did during the golden days. Unfortunately, China cannot and will not be the world's saviour.

What happens next in China will largely depend on Beijing's ability to treat the ailing patient.

[KrishnaK]

Social upheavals the drone says

[pankajs]

Apologies if this has been posted before.

China’s crazy love affair with steel is a scary example of how its finances could implode - Quartz

But wait—what exactly was China importing so furiously in July? Heaps of iron ore, it seems. Imports of the metal leapt to a record 73.1 million tonnes (80.5 million tons), up 26.7% on the previous year. That’s more than it imported during the many months of the infrastructure bonanza between 2009 and 2012, when the government pumped $11.2 trillion into the economy

Some think this means the economy is stabilizing; “steel demand is quite strong” (paywall), Maquarie analyst Graeme Train said. But it’s weird, because China’s businesses really don’t need new steel. It’s so hard to find buyers that steel mills are now storing 225,000 tonnes of steel, up 1.8% from last year. By one estimate the industry has a fifth more production capacity than it needs. And of China’s major steel mills, 40 out of 86 operated at a loss in H1 2013.

One answer might be that Chinese steelmakers are keeping their furnaces going not to build more skyscrapers, but quite simply as proof that they’re busy so they can keep lines of credit open with banks, as Reuters reports—probably to avoid defaulting on existing loans.

That story should sound familiar: It’s been happening in other industries all over China. The economy is slowing, crimping cash-flow and leaving companies without funds to cover bad debts taken on during the infrastructure boom.

But even this crazed pumping out of unnecessary steel may not fully explain why iron imports are so high. As Société Générale’s Wei Yao noted today, the import boom could signal “reviving [of] commodity financing as a way of coping with domestic liquidity squeezes.” In other words, the cash crunch in May and June meant steel companies started using iron ore as loan collateral once again.

Why would they do that? Because you can get a lot more credit for a pile of iron ore than the pile is actually worth, and then you can go speculate with that capital on, say, real estate. An article in Time Weekly (link in Chinese) offers a series of disquieting quotes on how this works from interviews in Shanghai, the hub of iron ore-trading:

“At present, a slew of steel trade bosses have fled. They don’t want the [iron ore] collateral—prices have now bottomed out, and since they’ve already gotten loans, they’re leaving the iron ore for the banks to handle. On top of that, we don’t know how many times a batch of the commodity has been offered up as collateral.” – a Shanghai steel trader.

Here’s how that works:

“For example, a steel company puts $1 million worth of goods in a warehouse. He then pledges this collateral to a dozen or so banks. Just like that, $1 million in goods becomes $10 million in capital. The risk to banks is obviously really high. When steel prices were up, it was hard to realize what was going on. But when they fell, companies couldn’t repay their loans and their bosses skipped town. The boss doesn’t care about the iron ore any more now that he’s turned $1 million into $10 million. So the loss all falls on the bank.” – A general manager of a steel trading company

And what the banks think about that:

“The situation is extremely pessimistic, and the risk of not getting our loans back is huge.” – a senior manager at a Jiangsu bank branch.

“About 60% of loans to steel companies are non-performing loan. At present, we haven’t received back any of the credit extended to steel companies.” – a Bank of Communications executive.

So China’s steel sector looks ugly. But bad as it is, it’s really just a microcosm of what’s wrong with China’s bank lending habits in general. Iron ore isn’t the only thing loan officers accept as collateral; copper and rubber are just another couple of examples. And those have nothing on the scale and magnitude of what’s most commonly used as collateral: property. If the steel sector can cause this much trouble for banks, imagine what will happen when real estate values start to slide.

[wong]

Pretty much as I predicted, a big yawn about the Indian crisis because China and Japan are doing well and India doesn't matter to the western central bankers. The only bailout for India will come from the IMF and only at unfriendly, non-European terms. Learn to save for a rainy day like China and Japan has done.

http://www.nytimes.com/2013/08/23/busin ... rechp&_r=0

Muted Fears of Contagion as Asian Currencies Fall

HONG KONG — South and Southeast Asia are being buffeted by broad shifts in international economics, but with Japan and China to the north largely unaffected, fears of a more widespread crisis are being played down.

PS: I've said this a million times. You can't go bankrupt owing money to yourself. Chinese state companies can owe a $10 Quadrillion dollars to the Chinese state banks and it can be washed away with the stroke of a pen just like in the early 2000s. With dollar denominated foreign debts like your companies have taken on, not so much. There will be a lost decade, but it won't be China's.

[wong]

wong: Keep India out of this thread.

Way too much hyperbole. China's history is characterized by constant upheaval and overthrow of dynasties, invasion and the gain and loss of territory, with enormous bloodshed and brutality in the process. Continuity in the form of peaceful transfer of power AND cultural continuity does not exist - you had centuries of Mongol and then Manchu domination. China effectively repudiated its own culture in the 1960s, and no longer has a claim on its own history - Taiwan is the only remaining bastion of real historic Chinese culture. No need to jump in with 'Taiwan is China'. It's not. Different country, different culture, different politics.

China's communist polity may have been run by people of unrelated backgrounds. But their emphasis on retaining their power structure is far more solid than anything in any democratic framework, where any party is an election away from the opposition benches. A real democracy, not like Saddam getting 99.96% of the vote...

Suraj, let's say I get into a time machine and go to the year 5,000 in the the future. The USA is probably 3 countries by then (2 Latino and 1 everything else country). Who knows about India (probably being occupied by a foreign power), but I'm pretty sure China will still be there. Not hyperbole, just an educated prediction based on a VERY Long time series.

[pankajs]

Key Chinese cities and provinces set to receive stimulus - on the quiet - South China Morning post

The mainland government is quietly offering financial stimulus to key cities and provinces to help them maintain local economic growth.
This is in addition to Shanghai taking up a huge loan from a state-owned bank to set up the first Hong Kong-like free-trade zone on the mainland.

Ah! If "You can't go bankrupt owing money to yourself" one wonders what this sly stimulus? Could it be that the powers realize this as problematic?

This year senior government officials have repeatedly insisted that Beijing will not launch any nationwide economic stimulus - as it did in 2008 - to ensure that the world's second-biggest economy will not see a significant slowdown. But the sources, who declined to be named due to the highly sensitive nature of the matter, said Beijing did not rule out the possibility of "unofficial economic stimulus" to help key economies like Shanghai boost their growth.

Again, why is the Chinese government publicly insisting on NO nationwide economic stimulus if it is such a good thing?

In late 2008, Beijing announced a massive 4 trillion yuan stimulus package to help keep the country's economy growing during the financial crisis in the West. But it came under fire from many scholars and even some government insiders for being ineffective.

Again, why would "many scholars and even some government insiders" criticize such a stimulus? Could it be that these Chinese scholars and insiders do not buy the line "You can't go bankrupt owing money to yourself" even when repeated gazillion times?

[wong]

^^^^

Yup, that's right. You can't go bankrupt owing money to yourself. The Federal Reserve can print $80 billion a month in new money to lend to itself and when they stop, it's Indonesia and India that gets crushed. China owes Yuan to itself just like the Fed owes dollars to itself. Why is this concept so difficult?? (Yes, I know exactly how the Fed QE works, I've just simplified it for you guys). My left hand just agreed to lend my right hand €100 Quadrillion Euros. What are the implications of this huge, huge debt for me??? Zero.

[pankajs]

Why worry if someone anon on some BB does not get it? You should rather worry about those in your government who too do not understand your line. They are the ones who will influence your governmental policies and your future assuming you are from mainland China.

For the rest of us...we welcome multiplicity of views on this board...some we agree with some we don't.

And in the spirit of things here is another one....Enjoy!
Likonomics: believe it when you see it - Quatz

Like Abenomics, Likonomics is based on three pillars:

1) Ending fiscal stimulus by diminishing state-led investment.
2) De-leveraging in order to slash debt.
3) Structural reform, including relaxing controls on utility prices and liberalizing interest rates.

<snip>

Since the Chinese government seldom issues bonds, “fiscal stimulus” actually just means “lending.” And in China, lending is one of the only sources of growth for most of the economy—it now depends on the gush of lending to grow.

Or, at least, to look like it’s growing.

[wong]

^^^^

Not worried. Rather enjoying this as the Chinese poster's predictions are all coming true.

[pankajs]

Good for you

[pankajs]

A little over 2 month old. Fitch too does not understand that left hand lending to the right hand and vice versa nets out to zero at the end.

Fitch says China credit bubble unprecedented in modern world history - Telegraph/UK

China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.

The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses{Fitch does not understand that net of zero cannot be termed as excess} as in past episodes, implying tougher times ahead.

"The credit-driven growth model is clearly falling apart.{Why use the western model to judge the Chinese economy?} This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation{To Ms Chu and her agency: China is not Japan. The comparison is without logic}," said Charlene Chu, the agency's senior director in Beijing.

"There is no transparency in the shadow banking system, and systemic risk is rising.{How can Right hand borrowing from Left hand and vice versa create risk when both are part of ME??} We have no idea We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph.{Why the Left hand and the Right hand ... Why is this concept so difficult??}

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire US commercial banking system in five years," she said.{Good job China ... Must have taken some doing for sure}

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP{ME and my Pocket ... does it matter?}, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. "This is beyond anything we have ever seen before in a large economy. We don't know how this will play out.{The only thing beyond is the agency's lack of commonsense and understanding of the basic fact "China owes Yuan to itself". Period.} The next six months will be crucial," she said.

"There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s. With credit at 200pc of GDP, the numerator is growing twice as fast as the denominator. You can't grow out of that."{Wrong again! China has done it before and will do it again}

However, a new problem has emerged as the economic efficiency of credit collapses. The extra GDP growth generated by each extra yuan of loans has dropped from 0.85 to 0.15 over the last four years, a sign of exhaustion.{Right hand / Left hand! Savy??}

Wei Yao from Societe Generale says the debt service ratio of Chinese companies has reached 30pc of GDP – the typical threshold for financial crises -- and many will not be able to pay interest or repay principal.{Ok for now Forget the Right/Left hand ... Remember ME and only ME ... Say with me The principal and interest is owed by ME to ME ... So where is the problem!} She warned that the country could be on the verge of a "Minsky Moment", when the debt pyramid collapses under its own weight. "The debt snowball is getting bigger and bigger, without contributing to real activity," she said.

"There is room to cut interest rates and the reserve ratio in the second half," wrote a front-page editorial today in China Securities Journal on Friday. The article is the first sign that the authorities are preparing to change tack, shifting to a looser stance after a drizzle of bad data over recent weeks.

The journal said total credit in China's financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. "Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output," it said.{I give up .. Please someone teach Fitch the basics of economics ... and that Left hand is ME and the right hand is also ME ... so ME(Borrowers due) - ME(Lenders receipt) = 0}

[pankajs]

Less than a month old report. When folks use the western model to understand the Chinese economy only crap can come out of the exercise. See the crap IMF is peddling as analysis.

China orders 'urgent' audit of debts after IMF warnings - Telegraph/UK

China’s leaders have ordered an “urgent” audit of local government debt, responding to warnings from the International Monetary Fund that rampant borrowing by the regions could trigger a serious crisis.

The State Council told the country’s audit office to suspend work on other projects and launch an immediate inquiry to assess the gravity of the risk. The audit office in the northern port city of Dalian has cancelled holiday leave, and will dispatch inspectors this week.

Andy Xie, a financial commentator at news website Caixin, said reliance on land sales to fund regional spending was an accident waiting to happen. “While household income may have tripled in a decade, the average land price has risen by over 30 times. Income growth to come cannot justify the current price of land. Nor can a supply shortage. China has no shortage of land. The sustainable land value is probably 70pc to 80pc below current levels,” he said.

<snip>

The IMF is less sanguine. It warned last week that local government reliance on “off-budget activity” and land sales to pay its bills have pushed China’s underlying fiscal deficit to 10pc of GDP. “Fiscal space is considerably more limited than headline data suggest,” it said.

The IMF said these deficits “raise questions about local governments’ ability to continue financing the current level of spending and service their debts, which has implications for financial system asset quality. Further rapid growth of debts would raise the risk of a disorderly adjustment in local government spending. Financial distress would lead to a contraction in credit, a fall in domestic demand, and lower growth, which would make it more difficult for highly leveraged borrowers to grow out of their debt. The timing and coincidence of events that would trigger such an adverse feedback loop are difficult to predict,” it said.

<snip>

Richard Koo from Nomura said Beijing itself pushed regions into taking on more debt to keep growth going after the Lehman crash.

A third of local government debt cannot be repaid, yet officials are split over the wisdom of a central government bail-out.

The IMF said China will have to extricate itself from debt boom excess with great care, otherwise there could be a “severe credit crunch” and eventually “a systemic threat to financial stability”. {Systemic threat my foot ... left hand give/take with right hand all part of me all netting to zero all in yuan all controlled by me all washed away with the stroke of a pen ... See you can't go bankrupt owing money to yourself ... is that soooooooooo difficult to understand?? hain ji??}

[subhamoy.das]

let's say I get into a time machine and go to the year 5,000 in the the future. The USA is probably 3 countries by then (2 Latino and 1 everything else country). Who knows about India (probably being occupied by a foreign power), but I'm pretty sure China will still be there. Not hyperbole, just an educated prediction based on a VERY Long time series.

India will be broken into 500 small countries - just like before the Brits left or it will be broken into 30 countries as per current states. But the Indian Union could still be around.Not sure. Same can happen to CHINA as CHINA was integrated by force by a gentelman called CHIN and could get balkanized again!

[subhamoy.das]

^^^^

Yup, that's right. You can't go bankrupt owing money to yourself. The Federal Reserve can print $80 billion a month in new money to lend to itself and when they stop, it's Indonesia and India that gets crushed. China owes Yuan to itself just like the Fed owes dollars to itself. Why is this concept so difficult?? (Yes, I know exactly how the Fed QE works, I've just simplified it for you guys). My left hand just agreed to lend my right hand €100 Quadrillion Euros. What are the implications of this huge, huge debt for me??? Zero.

As long as the right hand returns the money back the books will be fine. But if the right hand does not return the money then the money will vanish from the books and you will have to print those money to maintain the books and at that point the value of your money will go down. US can print money and get away with it because it is a resever currency and like gold. CHINA does not have that postion yet and that position cannot be reached by just contract manufacturing. It can be reached by doing innovation and exporting innovation and also have a military which can protect the currency across the globe.

[Waylan]

Printing money out a la QE 1 and 2 is not the source of the problem. It is liquidity catching up with the insane rate of credit creation. Credit is being created exponentially in the US. GSE's alone whipped up $7 trillions credit with $40 billions cash to pay for the other side of $7 trillions debt. You don't need a liquidity reserve if an account is less than $10 millions. Compliments of Mr. Greenspan. Thank you very much.This insane amount of credit creation and debt explosion pushed US economy to service based one. US flow of funds came out a while back. Check it out. So if India wants to jump straight up to service economy, you now know how to do it.
Where do you think China gets the money for the $3 trillions sitting in PBOC? Just print off $3 trillion equivalent of RMB. And ship the US $ back to US. That's how reserves are created and maintained by central banks around the world. India included. Beauty huh?

[pankajs]

Couple of week old article.

China local authority debt ‘out of control’ - FT

A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash.

<snip>

“We audited some local government bond issues and found them very dangerous, so we pulled out,” said Mr Zhang, who is also vice-chairman of China’s accounting association. “Most don’t have strong debt servicing abilities. Things could become very serious.

The International Monetary Fund, rating agencies and investment banks have all raised concerns about Chinese government debt. But it is rare for a figure as established in the Chinese financial industry as Mr Zhang to issue such a stark warning.

“It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”{Explosion ... Hmmm ... pretty strong words for a supposed soft landing}

<snip>

Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”{Why does Mr Zhang along with IMF and Fitch NOT understand that moving money from Chinese state banks to Chinese state companies and Chinese local governments is not an issue ... after all in the end all of this nets out to zero for Chinese state ... Why does Mr Zhang, IMF and Fitch not understand the simple logic "You can't go bankrupt owing money to yourself"?}

Mr Zhang added that he grew alarmed when smaller towns and counties discovered that investment vehicle bonds were an easy way to raise financing. “This evolution was quite frightening,” he said. “China has more than 2,800 counties. If every county issued debt, it could lead to a crisis. It could be even bigger than the US housing crisis.”

Just look at the words that have been used to describe the situation arising from such a simple transaction as transferring money from MY left pocket to MY right pocket.These guys are making it seem as if a dozen atim bums have been unleashed on the Chinese financial system.

[Suraj]

Suraj, let's say I get into a time machine and go to the year 5,000 in the the future. The USA is probably 3 countries by then (2 Latino and 1 everything else country). Who knows about India (probably being occupied by a foreign power), but I'm pretty sure China will still be there. Not hyperbole, just an educated prediction based on a VERY Long time series.

Can't speak for countries but I know who will be out of here for the next 5000 years - you. You've been banned permanently for being a troll; two prior short term bans and a legion of warnings clearly didn't work.

[Waylan]

This is a tough call. I don't know who is more ****** up, us Chinese or IMF, rating agencies and investment banks et el.
People thought IMF actually stands for I am ******, for those who have to take their prescriptions. They either have diagonally opposite positions or just stand by there useless for US and Europe crisis though, as opposed to what they recommend and impose on the developing world.
I won't even go in there for rating agencies and investment banks. And they are saying bad stuff about Chinese. That's rich.

Couple of week old article.

China local authority debt ‘out of control’ - FT

A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash.

<snip>
The International Monetary Fund, rating agencies and investment banks have all raised concerns about Chinese government debt. But it is rare for a figure as established in the Chinese financial industry as Mr Zhang to issue such a stark warning.

[Theo_Fidel]

I have finally been catching up on Krugmans posts on PRC and they are quite illuminating.

Everyone appears to be curious/nervous on the future.

How does China raise wages WRT GDP, meaning increase the cost of their products at anything like what is necessary, 15% annual wage inflation necessary for 10 years apparently and still remain internationally competitive.

[svinayak]

We need a treat and party!

[Prem]

China Stopped Sharing Certain PMI Report Details Because They Were Subject To 'Accidental Changes'
http://www.businessinsider.com/why-chin ... z2d72FF4vK

China's monthly manufacturing purchasing managers index (PMI) is one of the most closely followed economic data reports in the world. Earlier this year it was reported that China would be suspending the release of industry-specific data from its manufacturing PMI.Now, Bloomberg is reporting that this happened because of accuracy concerns."We can’t ensure all industry-specific data can reach accuracy requirements," Sheng Laiyun, a statistics agency official said at a conference cited by Bloomberg. "Samples in some industries are very small, and accidental changes may affect overall data quality -- we were concerned that some of the numbers may affect related investors and users."Both the official and HSBC PMI data have been touted as one of the most reliable economic indicators out of China because they generally match other indicators of activity like industrial production and GDP.Xu Gao, chief economist with China Everbright Securities told Bloomberg he doesn't believe the explanation offered by the official. "Without these specific data, the credibility of China’s headline official PMI indicator is undermined," he said.

[SaiK]

http://www.zdnet.com/china-suffers-larg ... &ttag=e589
China suffers 'largest' cyberattack; Censorship makes it difficult to gauge attack scope

[Waylan]

If you can't determine the accuracy of these time series, don't disclose them. Straightforward. Nothing to be ashamed of.
Look at the net errors and commissions of US BoP. That's a contry's size hole right there.

China Stopped Sharing Certain PMI Report Details Because They Were Subject To 'Accidental Changes'
http://www.businessinsider.com/why-chin ... z2d72FF4vK

China's monthly manufacturing purchasing managers index (PMI) is one of the most closely followed economic data reports in the world. Earlier this year it was reported that China would be suspending the release of industry-specific data from its manufacturing PMI.Now, Bloomberg is reporting that this happened because of accuracy concerns."We can’t ensure all industry-specific data can reach accuracy requirements," Sheng Laiyun, a statistics agency official said at a conference cited by Bloomberg. "Samples in some industries are very small, and accidental changes may affect overall data quality -- we were concerned that some of the numbers may affect related investors and users."Both the official and HSBC PMI data have been touted as one of the most reliable economic indicators out of China because they generally match other indicators of activity like industrial production and GDP.Xu Gao, chief economist with China Everbright Securities told Bloomberg he doesn't believe the explanation offered by the official. "Without these specific data, the credibility of China’s headline official PMI indicator is undermined," he said.

[pankajs]

China's Growth Conundrum: Soft Landing Or See-Through Buildings? - Forbes

China-related stocks have been surging over the last few weeks, as positive news streams out, suggesting that China, against odds, has managed its “soft landing,” brought its financial speculators to heel, and is gradually pulling off a simultaneous deleveraging and re-ignition of economic growth.

But behind rising property values and seething demand for steel and iron ore lurk persistent worries about ghost cities, declining employment, and falling consumer demand. The international press is beginning to explore the cracks in the Chinese growth model: reporters are roaming from Inner Mongolia (see the NYT of August 16) to Liaoning (the WSJ of August 11) to understand why the stunningly obvious visual of empty buildings in every single Chinese city seems not to resolve itself into a generally acknowledged economic distress.

The two sets of observations on the economy seem to diverge more and more, leaving China’s continued demand for commodities as the sole criterion of truth, as Mao used to say. But iron ore prices are a thin reed on which to hang an assessment that a $8 trillion economy is growing at 7.5%–or instead maybe in recession. If China’s growth rate indeed remains the highest of any large economy, by a factor, as the government and most international investment banks aver, why should there be any doubt at all around China’s continued strength?

There are complex answers, having to do with how statistics are collected: China’s system is one of goal seeking to reach a political target rather than deduction from data collected.

However, the real resolution to the conundrum between stated growth and visible malaise lies in the leadership’s incentive system, constructed around raw growth at any price. For two decades now, China’s has been an investment market. Entrepreneurs, companies, investment funds, and the nation as a whole have sold the idea of a China that will grow into the world’s dominant economy, where future dividends will pay handsomely on the investment made to capture share today. Profits taken and wealth created have been from capital gains in IPOs, share appreciation, and M&A deals, not, by and large, from the operating returns earned by companies. Likewise, the remunerative nature of the massive new infrastructure and property investments is measured not by cash flows from the projects, but by the materials and labor projects require. What should be accounted for as a cost to the economy or urbanization is tallied as healthy income. Meanwhile, the projects amass new debt to keep their loan payments current.

The incentives for China’s political leaders have created a culture in which the nation’s economic health and the personal gain of elite clans have comingled and become confused. As this investment culture thoroughly penetrated companies throughout China, so did it become both the justification and the engine of political success. Investment-fueled growth has been rewarded with new investment capital, which in turn made it possible for China to grow. When, starting around 2008, international and domestic markets curtailed their appetite for new investment, China’s central government assumed the role itself, printing an unprecedented amount of money that has brought the supply of money to 425% of GDP , where the money supply of even free-spending America stands at about 64% of GDP for Q2 2013.

In these latter years of reform, especially since 2000, imagine China as a sort of virtual Silicon Valley in 1995, but one in which the political equivalents of Alan Greenspan and George Bush are also owners of pre-IPO shares in companies like Amazon and Yahoo ! This is the position in which the political leadership of a country that has maintained government ownership of the most lucrative companies finds itself: when political leaders are also board directors of lucrative monopoly companies, there can be no concept of conflict of interest.

Creating and pitching the dream of perpetual growth then becomes a big business both for the nation and for its political stewards. The payback has been abundant for people positioned to benefit from capital gains on almost any kind of asset, from Internet to real estate to banking and insurance.

Under the best circumstances, the spell cast by a salesman’s pitch takes a long time to dissipate. Under the circumstances that actually exist in China—close alignment of the interests of business and political leaders, as well as regulators and statisticians— it is unavoidable that all resources will be focused on the optics of China’s markets rather than on the wobbly reality. Mao’s fabled message to writers and artists in Yan’an, to hold fast to proletariat optimism, has evolved into a silent guideline in late reform China, hold fast to investor optimism.

For months now, the new political leadership will have spent time and political capital on the case against former top leader Bo Xilai, whose trial commenced on Thursday. To achieve unity around a case that will surely implicate many from the former government certainly cost capital, both political and financial: it may be that the slight economic upturn in July and August resulted from sharp increases in spending on infrastructure targeted to localities that otherwise might have presented political difficulties.

These political deals form the real struts of the Chinese economy. The multiple purposes of the leadership require capital: the system must deliver special benefits to sensitive regions, provide foreign investors with the outsized returns that justify the risk associated with investing in China, provide political leaders with the personal gain to which they have become accustomed, and provide the general public with a sense of momentum. If growth does not occur on its own, it must be generated now; China has been spending the equivalent of over 70% of its GDP in fixed asset investment in order to achieve its growth targets.

All these purposes require capital, and capital demands returns. For that simple reason, whatever else happens in China, its GDP growth will not be allowed to fall.

[subhamoy.das]

Where do you think China gets the money for the $3 trillions sitting in PBOC? Just print off $3 trillion equivalent of RMB. And ship the US $ back to US. That's how reserves are created and maintained by central banks around the world. India included. Beauty huh?

The only problem is that CHINA is holding most of that money interms of US stocks called "Treasury Bond" and the actual money is back in US. China is at the mercy of US to sell these stocks or if the value of these stocks vanishes. They cannot simply print RBM but will have to sell these stocks to get the money first. So CHINA will have to print extra money for covering its bad loans incurred by the right hand.

[subhamoy.das]

The Forbes article lays it out very clearly the pitfalls of contract manufacturing driven growth model where a small % of that GDP stays inside CHINA in terms of factory wages and hence cannot drive consumption and so CHINA has to rely more and more on investment to sustain the GDP which is not a sustainable model anyway. It is a vicious cycle but not sustainable.

[Waylan]

I hope you actually know what you are talking about. Because I have no clue what you want to say.

Where do you think China gets the money for the $3 trillions sitting in PBOC? Just print off $3 trillion equivalent of RMB. And ship the US $ back to US. That's how reserves are created and maintained by central banks around the world. India included. Beauty huh?

The only problem is that CHINA is holding most of that money interms of US stocks called "Treasury Bond" and the actual money is back in US. China is at the mercy of US to sell these stocks or if the value of these stocks vanishes. They cannot simply print RBM but will have to sell these stocks to get the money first. So CHINA will have to print extra money for covering its bad loans incurred by the right hand.

[pankajs]

China will soon have 40% more coal than the combined weight of the human population

Years of excessive investment are catching up with China, and the latest example is coal. Its reserves now contain 220 million tons (200 million tonnes) of coal, as the Hao Hao Report notes. That puts China on track to have as much as 440 million tons by the end of 2013, according to the China National Coal Association (CNCA)—around 40% more than the combined weight of the entire human population.

This excess coal has driven prices down by half, compared with the same period last year. Now 24 of China’s biggest coal companies—nearly one-third—are losing money, says Jiang Zhimin, vice-chairman of the CNCA. ”All the enterprises in the provinces and municipalities of Heilongjiang, Jilin, Yunnan, Chongqing, Anhui and Jiangxi are experiencing losses,” adds Jiang.

How does a country amass that much unneeded coal? By pumping trillions of yuan into coal mines, for one. From 2000 to 2005, investment totaled only 200 billion yuan ($32 billion at the 2013 exchange rate). In 2012, even as the economy noticeably faltered, China invested 529 billion yuan ($86 billion in 2013 terms) in coal mining.

High rates of investment are bound to slow. For one thing, a seize-up in available money in China has caused banks to stop lending (paywall) to coal miners. And this is hitting companies that purchase coal too—notably, steelmakers—which have also over-invested in expanding their businesses. Coal industry customers are saddled with some $52 billion in debt, says the Hao Hao Report.

This means many coal barons out there are holding loans that, with coal prices down 50%, will be impossible to pay back. That’s already causing calamity in some places. Take Shenmu, in coal hub Shaanxi province, where an estimated 60% of capital (link in Chinese) has flowed into coal mines. As a result, the government invested its glut of tax revenues from coal into 15 years of free education and free health care services. The coal bust has driven the entire town into chaos as coal bosses with enormous debts have resorted to fraud or skipped town.

[pankajs]

China can't beat economic laws - Hudson Institute / The Australian

Now that both major political parties accept that the best days of the commodity boom are over, the question inevitably will turn to whether the Chinese economy will have a soft or hard landing during the next few years.

The reality is that there is no good option available for the Chinese Communist Party. A soft landing will mean that serious structural problems will have been swept under the carpet, delaying the day of reckoning that will be only more painful when it arrives. A hard landing, possibly resulting from the consequences of genuine structural reform, will mean immediate trauma for the economy, which will place the party's political survival at risk.

Either way, Australia's China-driven good fortune is on borrowed time.

Those who still believe a rapidly urbanising China will continue to drive record rates of consumption for our iron ore for generations are in for a rude shock. The numbers reveal that China's voracious consumption of commodities across the past decade has remarkably little to do with the genuine demands of urbanisation, makes little economic or commercial sense, and cannot continue.

Since the mid-1990s, genuine urbanisation has been advancing at the rate of less than 1 per cent each year. Yet fixed investment (which drives commodity consumption) has been growing at 20 per cent to 40 per cent each year for the past decade and is now much more than 50 per cent of gross domestic product. During the periods of rapid industrialisation in Japan, Taiwan and South Korea, fixed investment did not rise above 35 per cent of GDP.

That China is dangerously embarking on a unique and unprecedented economic path is further confirmed by the fact that from 2008 to last year alone, bank assets in the form of outstanding loans have increased by about $US14 trillion ($15.2 trillion), equal to the amount of the entire American commercial banking sector. Debt to GDP now exceeds 200 per cent. The fact the stimulus model is no longer working is confirmed by figures showing that China achieves about 17c of output for every dollar of credit-fuelled stimulus, compared with more than 80c of output when the binge began in 2007.

Presently, debt to GDP exceeds 200 per cent when one includes the so-called shadow banking sector, which involves unregulated and off-book loans by banks and other borrowers. Since so much of the capital has been spent on speculative projects such as empty "ghost cities" and millions of luxury housing units that will never see a single resident in them, China's state-dominated banking sector is likely to face bad debts of more than $US3 trillion across the next few years as outstanding loans mature.

Unsurprisingly, the reform-minded Premier Li Keqiang now speaks incessantly about structurally reforming the economy through rebalancing. This means dramatically cutting back on building unneeded things and ramping up domestic consumption.

The problem is that genuine structural reform, needed to place the next stage of Chinese economic growth on a sound footing, will necessarily lead to a hard landing - defined as zero growth or economic contraction. Remember that as powerful as they are, Chinese authoritarian leaders cannot force people to consume. Only enormous and rapid increases in across-the-board household income can trigger significant rises in consumption.

For that to occur, economic opportunity and national wealth would have to be distributed more evenly. There are about 144,000 state-owned enterprises that account for almost half of the country's business and industrial profits and more than 70 per cent of China's fixed assets - with tens of millions of fledging private firms making up the remainder. Significantly raising across-the-board household incomes would mean radically winding back the economic privilege and protection afforded to SOEs in favour of private firms, as well as ordering an unprecedented transfer of assets belonging to SOEs into private hands.

Given that a dominant SOE sector is critical to the party's hold on power, such reforms are highly unlikely. Besides, the immediate loss of output that would result from such a reform would be intolerable as far as the party is concerned.

What about the prospect of a softer landing?

This really means preserving the present state-dominated model, with some tactical tinkering designed to insure against the systemic collapse of the financial system and property asset values.

This is what the party has been doing and will continue to do. For example, it is trying to clamp down on the out-of-control shadow banking sector to reduce growing levels of unregulated credit flowing into speculative building assets. Debt issued by the shadow sector has grown from about$US2.9 trillion in 2010 to more than $US6 trillion now. The problem is that attempts to gently deflate asset bubbles by reining in credit rarely ends well for any economy; just ask Japanese and US central bankers. Besides, the fledging private sector, having been starved of formal funds, depends on the shadow banking sector to survive.

Meanwhile, knowing that well-to-do Chinese citizens and cash-rich firms are desperately searching for ways to take their money out of the country, Beijing will continue to place severe restrictions on its capital account to ensure that locals have few options but to deposit savings into Chinese banks. With China's five largest banks holding more than $US14 trillion in deposits, this will ensure sufficient liquidity to fund a failing growth model for a few years yet.

This may mean more fixed investment growth and some extended joy for our miners. But when the laws of economics eventually catch up in this era of the Chinese economy, then future economic reform and transition to a successful middle-income economy will be that much more difficult.

John Lee is a Hudson Institute Visiting Fellow and an Adjunct Associate Professor and Michael Hintze Fellow for Energy Security at the Centre for International Security Studies, Sydney University. He is the author of Will China Fail? (CIS, 2008).

[pankajs]

FT series: The Debt Dragon - 3 part series and much more (paywall)

The government says its debt problem is under control but the reality is much more worrying. The FT investigates how government, corporate and household debt have all risen sharply

[pankajs]

The debt dragon: Credit habit proves hard for China to kick - FT (paywall)

The Chinese government says its debt problem is under control, but the people of Pianpo village have cause to disagree. Over the past year they have seen their water cut off, rubbish pile up in the streets and their wages go unpaid as debt has mounted.

An elevated motorway soars over the villagers’ concrete homes, meant to connect them to central Guiyang, one of China’s fastest-growing cities. Instead, the slip road to Pianpo ends in a patch of gravel.

The state-owned company building the road took on too much debt and could not pay its construction workers. Water pipes were dismantled when the roadworks began but were never repaired when cash ran short. A couple of times a day, Chen Xiuxiang, 75, trudges up a hill to fetch his weight in water – 120 pounds – from a working tap, carrying two buckets on a wooden pole across his shoulders. Most of his neighbours do the same.

“They keep promising they’ll fix things but they never do,” says Mr Chen.

For most of its past 30 years of growth averaging 10.5 per cent, China did not rely on credit. But it has become ever more reliant on debt since the global financial crisis, drawing on banks, bonds and an array of lightly regulated institutions to keep its economy roaring.

This debt dependency has put China at a dangerous crossroads. If the government is serious about containing financial risks, growth may slow sharply as it weans the country off debt, burdening the global economy. Yet that prospect is less frightening than the alternative. If the government loses its nerve, the debt bubble will continue to expand, raising the spectre of economic turmoil.

“Risks over China’s financial stability have grown. Credit has grown significantly faster than gross domestic product,” Fitch Ratings gave warning this year when it cut China’s sovereign rating, the first such downgrade by a big international agency since 1999.

Total debt in China – government, corporate and household – has shot up from 130 per cent of gross domestic product in 2008 to nearly 200 per cent today, or more than Rmb100tn ($16.3tn), according to Chinese central bank data. Such a rapid increase in borrowing has historically led to crises in countries from Argentina to South Korea.

The trail of debt in China starts on the desks of ambitious government officials, especially at the municipal level. Capital of the southwestern province of Guizhou, Guiyang is one of China’s poorer cities, but it has boomed in recent years – and it is a prime example of its debt-fuelled economic model. “We need to struggle for GDP,” Yuan Zhou, Guiyang’s then mayor, thundered in a radio interview in 2011. “Only with higher GDP will people’s lives be improved.”

To stimulate growth, local officials deployed a simple technique, one replicated throughout the country. The government appropriated rural land on the cheap from farmers, sold it to property developers at a mark-up, and the developers in turn built dense clusters of tower blocks.

“The government is the engine and the market gives it a push,” is the slogan at an urban planning hall, where a diorama of the Guiyang of the future looks like Manhattan on steroids.

Guiyang’s growth has relied on a constant ratcheting up of investment. To keep the local economy growing at 15 per cent a year, the government has needed real estate companies to buy ever more land and build ever more homes.

One of the city’s first big developments was Century Town, completed in 2010 and designed for 40,000 people. Soon after came Future Ark, planned to accommodate 170,000 residents. Cranes are now erecting towers for Garden City, which will be large enough for 350,000 people – more than one in 10 of Guiyang’s residents.

Garden City will have 31 bus lines, 10 shopping centres and eight schools. Its showroom, which sits just beyond a fake lake festooned with plastic dinosaurs, has been buzzing with prospective homebuyers this summer. But the property developments that preceded it offer cautionary tales.

Zheng Wei, a salesman at Century City, says that its rows upon rows of identical grey flats are only half occupied. Many of the shop spaces at its base are shut, a thick film of dust coating their windows. “Because there are so few people here, no businesses dare open,” he says.

Future Ark has plastered Guiyang in advertisements – motorway hoardings, glossy leaflets, signs on taxis and jingles on the radio. “Buyers used to chase us. Now we chase them,” a saleswoman says.

The slowdown in housing sales is not just a problem for the developers. It has also started to expose the extent to which government debt has underpinned the property frenzy.

Officially, Guiyang’s debt load is tiny, just 17 per cent of its municipal GDP. Yet any accurate tally has to look beyond the official figures to what are known as “local government financing vehicles”.

By law, China’s local governments are not allowed to fall into debt – they cannot borrow from banks or issue bonds. But there is a loophole. Cities, towns and villages can create financing vehicles at arm’s length. Owned by local governments but incorporated as companies, they have a free hand to borrow cash.

And borrow they have, playing a crucial role in the transfer of government-owned land to property companies. The financing vehicles raise the funds needed to resettle displaced farmers, build roads and dig sewers, making the land attractive to investors.

In Guiyang, there are at least five official financing vehicles, all established since 2008. If their liabilities are added up, the city’s debt ratio last year would have tripled to 58 per cent of GDP. It’s a similar picture across China: analysts think government debts run anywhere from 40 to 80 per cent of GDP, up at least twofold since the start of the financial crisis.

<snip>