The Billion-Dollar Question: When Will China's Local Debt Explode?
Unless the CCP embraces capitalist innovation and public accountability, which is unlikely, China's local debt could cause the central bank to collapse by 2030.
On December 5, rating agency Moody's downgraded China's credit rating. Moody's also downgraded the credit ratings of Hong Kong, Macau, and numerous Chinese state-owned enterprises, banks, and insurers. This move was prompted by the collapse of the real estate bubble and potential local government debt crises in China. Moody's assessment highlights widespread concern that China's local debt could be the next major economic crisis.
But when exactly might this debt explode? In this essay, I take an in-depth look at the precarious financial situation in the People's Republic of China. According to at least one Chinese economist, the outlook is grim, and collapse is near.
Tracking a Bursting Bubble
Recently, a Chinese economist named Lao Man tackled the billion-dollar question of when China's local debt problem will explode. His approach is deceptively simple. Lao gathered all data on bonds issued by local governments. These data include the annual amount issued, interest rates, maturity dates, and the total principal and interest due at maturity. Using this information, Lao created a mathematical model to predict future bond repayments and funding gaps.
Compiling this data and calculating the future debt repayment burden reveals a clearer picture of when the debt bubble might burst.
However, this task is daunting. In 2016 alone, Chinese local governments issued 1,159 local government bonds. With no official total figure available, one must gather and compile all these figures for the calculation. This is an enormous task for any individual.
Lao Man's solution was to randomly select a 5% sample for his calculations. He confirmed the method's accuracy, finding only a 1.5% margin of error for formal local government debts and 10% for urban construction investment debts. Consequently, the conclusions based on this methodology are highly precise. Using Lao's figures, we can come closer to understanding when China's local debt bubble will burst.
Read the rest of the article here: https://japan-forward.com/the-billion-dollar-question-when-will-chinas-local-debt-explode/
12/13/2023
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