Lost in the worry over Greek debt defaults, China Daily reports on a default story of more significance. Please consider Local governments run up huge debts, risk defaulting

Local governments had an overall debt of 10.7 trillion yuan ($1.65 trillion) by the end of 2010, said China’s top auditor on Monday in a report to the National People’s Congress.

He warned that some were at risk of defaulting on payments.

It was the first time the world’s second-largest economy publicly announced the size of its local governments’ debts. The scale amounts to more than one-quarter of its GDP in 2010, which stood at 39.8 trillion yuan.

Concerns are rising that the problem of local government debt could destabilize the financial system of the country if it is not managed properly, especially after the central government’s tightening of the housing market, which could affect local fiscal revenue that is highly dependent on land sales and make debt repayment more difficult.

In addition, China’s ambitious plan to construct 36 million affordable homes during the coming five years, including 10 million in 2011 and 10 million in 2012, added to worries about increasing capital tension and rising non-performing loans in commercial banks.

About 79 percent of the local government loans were made by banks across the country, according to the NAO.

Lu Zhengwei, chief economist at the Industrial Bank, said the figures released were moderate compared with previous estimates, and risks lying in these loans are quite limited.

“Overdue loans take up only a small proportion of the total lending and local governments didn’t pay them in a timely way mainly because deadlines were too concentrated, not because of deteriorated ability to repay.”

$1.65 Trillion is a mountain of cash even to the US. How much of that is at risk is the question, but even 10% would be significant.

Moreover, it is certain that what cannot be paid back, won’t be paid back. As in the US, once assets backing loans crash, so will willingness and ability to pay back the loans. Thus, efforts by some to downplay the odds should fall on deaf ears.

Speculation in China is as least as rampant as it was in the US. For example, please consider Ponzi Financing Involving Copper Trade Gone Wild In China.

Also consider Wave of Violent Protests, Rioting, Bombings Hits China; Expect More Riots When China’s Credit Bubble Pops, Exposing Mountains of Fraud

Finally, please consider World’s Biggest Property Bubble: China’s Ghost Cities Revisited; 64 Million Vacant Properties

As long as credit bubbles expand, no one heeds warnings like that issued by China’s top auditor. Then when the bubble bursts, everyone cries they were not warned, they were taken advantage of, and they deserve a bailout.

One thing’s for certain, when China’s credit bubble pops, it will rock the world.

Mike “Mish” Shedlock
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