The looming Chinese debt bomb


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Some days, it seems like the modern banking industry never learns. Tucked into this otherwise rosily optimistic Economist report on the return of municipal bonds to the Chinese financial system is the following passage:

"...The 1994 ban has become counterproductive. It conspicuously failed to stop China's sub-national governments from borrowing indirectly. They have set up more than 10,000 financing vehicles, which took out loans from banks to pay for public works, such as roads and irrigation. The central government has struggled to count this debt , let alone control it. Analysts guess that 30%-60% of these loans may turn sour."

Will Chinese municipal bonds turn out to be the next subprime bubble? A former Chinese official certainly seems to think so. Back in September, Cheng Siwei, the former vice chairman of the standing committee of the National People's Congress, told the World Economic Forum exactly that, as Bloomberg reported.

It's always hard to discern what exactly is happening in China, thanks to the opacity of the government and what many insiders call a persistent culture of massaging and outright fabricating statistics. If there is an implosion in the local bond markets, the national government will do everything it can to keep it quiet by bailing things out behind the scenes.

If China ever rolls out its own TARP program, it will be a sign that things have gotten very bad indeed. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Bonds

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