The New York Times is also getting into the local debt problem. They use central China’s Wuhan as their example, talking about both the incredibly fast development and the risks of how it’s all being financed:
In the seven years it will take New York City to build a two-mile leg of its long-awaited Second Avenue subway line, this city of nine million people in central China plans to complete an entirely new subway system, with nearly 140 miles of track.
And the Wuhan Metro is only one piece of a $120 billion municipal master plan that includes two new airport terminals, a new financial district, a cultural district and a riverfront promenade with an office tower half again as high as the Empire State Building.
The construction frenzy cloaks Wuhan, China’s ninth-largest city, in a continual dust cloud, despite fleets of water trucks constantly spraying the streets. No wonder the local Communist party secretary, recently promoted from mayor, is known as “Mr. Digging Around the City.”
The plans for Wuhan, a provincial capital about 425 miles west of Shanghai, might seem extravagant. But they are not unusual. Dozens of other Chinese cities are racing to complete infrastructure projects just as expensive and ambitious, or more so, as they play their roles in this nation’s celebrated economic miracle.
But there are growing signs that China’s long-running economic boom could be undermined by these building binges, which are financed through heavy borrowing by local governments and clever accounting that masks the true size of the debt.
The danger, experts say, is that China’s municipal governments could already be sitting on huge mountains of hidden debt — a lurking liability that threatens to stunt the nation’s economic growth for years or even decades to come. Just last week China’s national auditor, who reports to the cabinet, warned of the perils of local government borrowing. And on Tuesday the Beijing office of Moody’s Investors Service issued a report saying the national auditor might have understated Chinese banks’ actual risks from loans to local governments.
As municipal projects play out across China, spending on so-called fixed-asset investment — a crucial measure of building that is heavily weighted toward government and real estate projects — is now equal to nearly 70 percent of the nation’s gross domestic product. It is a ratio that no other large nation has approached in modern times.
Kenneth S. Rogoff, a Harvard economics professor and co-author of “This Time Is Different: Eight Centuries of Financial Folly,” has studied China’s boom. He predicts that within a decade China’s lofty property bubble and its mounting debts could cause a regional recession in Asia and stifle growth in the rest of the world.
“With China, you have the ultimate ‘this time is different’ syndrome,” Professor Rogoff said. “Economists say they have huge reserves, they have savings, they’re hard-working people. It’s naïve. You can’t beat the odds forever.”
By Beijing’s estimate, total local government debt amounted to $2.2 trillion last year — a staggering figure, equal to one-third of the nation’s gross domestic product. A wave of municipal defaults could become a huge liability for the central government, which is sitting on about $2 trillion in debt of its own.
And Beijing’s estimate of what the cities owe might be too low, in the view of Victor Shih, a professor of political economy at Northwestern University who has studied China’s municipal debt. He says that by now, after even more borrowing in early 2011 and some figures hidden from government audits, total municipal debt in China could be closer to $3 trillion.
I’m not an economist, but a lot of that sounds pretty risky to me. One thing we’ve seen over and over again is that the Communist Party tends to focus on whatever is threatening it at this very second. Do they have a plan for a potential threat like this? The plan would have to deal not only with the immediate effects of the bubble bursting, but also the complete reordering of the Chinese economy that would follow. Even if China doesn’t crash, but merely slows down, will the country be able to function? People love to talk about the so-called “Chinese contract,” the theoretical deal where the people of China excuse sub-par political and rights scenarios because of how quickly the country is developing. What happens when the Good Times end?