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:
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.