Chinese mothers and politicians are actually pretty similar. Safety conscious Chinese parents causing baby formula shortages “from the Netherlands to New Zealand” worry that what they are buying isn’t what it is supposed to be. Chinese politicians are worried about the same thing. Beijing is terrified that the Chinese finances are a house of cards and unfortunately the evidence of this keeps mounting.
As credit crunched in the last week of June because the Peoples Bank of China declined to provide overnight lending knowing the perilous state of state bank finances, the banks scrambled to meet capital adequacy ratios. Since the end of the second quarter, Chinese banks have seen a trillion reminbi of deposits leave while seeing an explosion of credit. In the first of week of July alone, 700 billion reminbi of deposits left and loans grew by 170 billion. As Forbes notes, this comes from moving off balance sheet items back on the balance sheets and more worryingly not recording loans as deposits.
Even the Chinese government and press is waking up to the idea that the numbers they are being given are less than realistic. The Chinese deputy finance minister of China actually admitted “the total amount of borrowing by local governments was unknown but he also asserted it should be manageable.” I am unsure how you don’t know how much debt you have but know that the risk is manageable, but I am sure those Chinese statisticians will come up with something. It is too bad that it took Detroit going bankrupt to bring the risks home. I would have thought the 2008 financial crisis would have brought the issue of excess leverage home, but what do I know.
In an amazing show of independence, Chinese papers are even questioning land sales data. Different ministries and government agencies that provide land sales data have been caught publishing such widely divergent numbers as to warrant skepticism by the Communist Party mouthpiece. The reason this matters is because to reduce debt and pump GDP, local governments are selling land, and a lot of it. According to one report, the first tier cities in China have already sold more land in 2013 than all of 2012 with another report saying land sales were up more than 40%. Furthermore, the land is being sold for record amounts with final sales prices to consumer in many cases expected to top more than $1,000 a square foot or twice the average price in San Francisco. Not sure how a farmer moving to the big city can afford that type of apartment so even mass urbanization won’t solve that problem.
The reason land sales and debt statistics matter is because they are intricately linked. By one estimate, local Chinese governments received 40% of their revenue from land sales. An acceleration of land sales by such an enormous amount should be an enormous warning signal that local governments are under enormous financial strain. Local governments are selling assets to meet debt obligations. Politically motivated loans are being made to developers so they can buy land and build enormous apartment blocks at $1,000 a square foot even if existing occupancy rates hover around 50% in most big cities. The government is telling you how bad their debt burden is. I have heard anecdotes of local government projects with total revenues not approaching debt service costs.
I mean building over priced homes with nobody living in them could never come back and cause problems right?