According to the Financial times, a top Chinese auditor has warned that local government debt in China is “out of control” and could spark a bigger financial crisis than the US housing market crash.

Here is what the head of leading Chinese accounting firm ShineWing said after he stopped signing off on bond sales by local governments as a result of his concerns:

“We audited some local government bond issues and found them very dangerous, so we pulled out. Most don’t have strong debt servicing abilities. Things could become very serious.

It is already out of control, and a crisis is possible. But since the debt is being rolled over and is long term, the timing of its explosion is uncertain.

The only thing you can do is issue new debt to repay the old. But there will be some day down the line when this can’t go on.

When the time comes, it won’t be the government that assumes responsibility. It will be the accounting firms and the banks that do.

This evolution was quite frightening. China has more than 2,800 counties. If every county issued debt, it could lead to a crisis. It could be bigger than the US housing crisis.”

Local government bond outstanding across China is now estimated to be between US$1.6tn and US$3.2tn, equivalent to 20-40 per cent of the size of the economy.

Source: FT
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6 Responses to Chinese Auditor: “China’s government debt may cause the next global crisis”

  1. Rodrigo Rodrigues says:

    American bankers have helped build up and hype China’s image and stock market by creating IPO-worthy companies from dozens of small provincial companies rolled up into larger ones,, the underlying reality is that the economy works mainly for the elite members of the Party; not the Chinese people (whose hard-earned savings essentially keeps the banking system solvent) or outside investors.
    If China runs out of money they could end up asking for the U.S. to pay back what we owe to them so they can pay off their debts. Obviously we don’t have the money we borrowed, we spent it all, that could also be an excuse for China to attack America in order to take our land as payment for the debt they hold against our government. That would not be good for the U.S., China’s army easily outnumbers ours because every male is required to serve when they reach a certain age in China. The only way the U.S. could attempt t keep up is by instating a draft and calling help from our allies, and even then it would be a stretch because China too would call help from its allies.
    China’s big banks don’t need to be solvent to stay in business, since who knows if they have ever been solvent. Big bank liabilities are state liabilities and thus risk-free. If at some point China decides to recap its banks, it can do so with government bonds. The only institutions to worry about are banks and nonbanks outside the central government’s safety net.

  2. Jovan Lloyd says:

    China does not have a real airforce or navy. Therefore it cannot win a war with the US. It would be sucicide for China. China just got its first aircraft carrier this year. Guess how many the US has 11! The US is the only country that polices the world and we contain China and North Korea in a small box. If they come out that box we tax that ass! By the way about 90% of our ships, submarines, aircrafts are capable of intercepting nuclear weapons. Do not be fooled by the television. Those anti nuclear interceptors around the US and Guam are just a last resort if any of our ships and aircrafts stationed around the world cannot intercept the nuc’s. We police the world remember?! US does not even need allies because its military might in the Navy and Airforce is so strong. We could of just dropped bombs on Iraq and Pakistan and called it a day. North Korea strong holds we take about 2 weeks max to seize.

  3. R says:

    One Word

    Nukes

  4. Mexeconomista says:

    I´m sorry my friend but you do not have a clear strategic picture regarding China´s vs US military forces.

    There is no chance in hell for China in invading the US. For starters, the US has nuclear missiles, and could turn China into a giant glowing wasteland in about 30 minutes.

    Second, even IF the US did not go nuclear, the US Navy is vastly, vastly, VASTLY superior to the Chinese Navy. Remember that China would have to cross the Pacific to get to US shores.

    And even IF China could field its huge army in US ground, the US Air Force is vastly, vastly, VASTLY superior than the Chinese.

    Granted, the Chines ground forces are formidable (and as the soviets used to say, quantity is a quality in itself), but there´s no way to put them in the continental US.

  5. Mexeconomista says:

    the US strength is its weakness. You think yourselves strong, and you are. So other countries fight an asymmetric, “smokeless” war, by constantly undermining US interests all over the world.

    The US is a big house, except it has termites, eating away at its foundations.

    World War 3 started years ago.

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