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It is among the cities most heavily indebted and at risk of defaulting on its loans, according to Nomura Holdings Inc


By Enda Curran - Jun 10, 2015, 20:21:07



Under a plan approved by China's State Council yesterday, Wenzhou will develop more types of bonds and allow trading of unlisted equities, technology and cultural products, according to a statement on the government’s website.


Wenzhou is among the Chinese cities most heavily indebted and at risk of defaulting on its loans, according to Nomura Holdings Inc.


In a new analysis described as one of the first of its kind, Nomura has dug into China's lending trail to see which cities and provinces are creaking under debt. They examined credit risks covering 30 provincial authorities and 265 cities.


The report comes as bad loans and defaults in China tick higher and local governments struggle to meet repayments after years of binge borrowing to build roads and bridges and keep the economy growing. Mizuho Securities Asia estimates China's regional liabilities have now reached 25 trillion yuan ($4 trillion), bigger than Germany’s economy.


Here's what Nomura's research found: the highest default risk is concentrated in the coastal and western provinces. Central China fares better. The danger provinces include Qinghai, Zhejiang, Liaoning, Hainan, Jiangsu, Fujian, Guizhou, Gansu, Chongqing and Heilongjiang.


"Assessing the geographic distribution of risks is becoming increasingly important, particularly as China’s bond market is on the verge of explosive growth," Nomura analysts led by Yang Zhao wrote in the report.


Among the cities, about 60 so-called third and fourth-tier cities carry the highest risk. These include: Datong in Shanxi province, followed by Sanya in Hainan, Wulanchabu in Inner Mongolia, Ganzhou and Shangrao in Jiangxi, Lishui in Zhejiang, Wenzhou in Zhejiang and Bazhong in Sichuan. First-tier cities like Beijing and Shanghai fared better in the analysis, helped by stronger economic fundamentals.


Nomura used 13 indicators that cover four risk areas: property market, fiscal, financial and economic fundamentals.


China isn't the only country with heavily indebted cities or state governments. In the U.S., Detroit and Stockton, California both emerged from bankruptcy in the past year.


It's the pace of Chinese borrowing and a lack of transparency around how much debt there is that has investors worried. Nomura estimates that China's local government bond market may balloon from around 1.2 trillion yuan to 12 trillion yuan by 2020.


A string of defaults would gum up the lending system, bring economic growth to a halt and runs the risk of social unrest. So the idea is to keep the credit flowing.






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Thanks for bringing up this matter on this forum. While the implications for Montreal's urban issues are at best, indirect, it is nevertheless instructive for an understanding of the global context.


As an avid (daily) follower/observer of China's events and issues, I believe I can confidently state that the Wenzhou case (and more broadly Chinese local and provincial governments over-indebtedness) is "just" one aspect of China's fragile, if not perilous, financial system--another well-known aspect being the general over-valuation of the stock market. As the above article mentions, "A string of defaults could gum up the lending system, bring economic growth to a halt and runs the risk of social unrest". But I have grave doubts that "keep(ing) the credit flowing" is a viable long term solution.


I also think that such fragility was long in coming, and is of the own making of the Chinese leadership. Indeed, for years, economic "growth" was spurred by huge investments in fixed assets (transport infrastructure, commercial and industrial developments and housing), with a notable disregard for financial sustainability. And while a large part of those investments were "private", it has to be remembered that bank lending was all too often "directed" by political authorities, as opposed to more normal market forces. How was it ever possible to occur? --Essentially because ordinary Chinese wage earners were compelled to save a significant share of their income, due to the inadequacy of the social net: so the surplus (over living expenses) went to cash savings (= banks deposits), and more recently, for an increasing number of individuals, to the (crazy) stock market. Beware indeed if much of those savings turn out to be worthless!


Malek, you ask whether Wenzhou could be China's Detroit. Well, you know that Detroit's decline leading to default has very different origins--no need to dwell on that here. I find that the U.S. financial system is proving quite capable of absorbing the impact of Detroit's (a a few other smaller cities) defaults. In China, if the only problem was with Wenzhou, it would be an easy one. But from what many (including my humble me) observe, the problem is vastly larger.


Perhaps a small lesson for us: borrowing heavily "because" money (i.e. interest rate) is so cheap is ill-advised.

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Always my pleasure.


Many USA detractors point to Detroit as a sign of its decline... This article opened up my eyes about huge issues with local debt in China.


As you say, the US financial system has a tougher and more experienced back bone to cope with Detroit. Not sure China has the same know-how.



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