Home > Free Republic > China’s debt spree returns to haunt

China’s debt spree returns to haunt

From Free Republic:  The Telegraph ^ | 10/11/2011 | Ambrose Evans-Pritchard

Bail-outs are coming thick and fast in China. In less than a week the authorities have had to step in to prop up the banks, rescue the insolvent railway system and save the near bankrupt city of Wenzhou from a spectacular debt crash.

It is proving harder than expected for the central bank to manage a calibrated “soft-landing” after letting rip with credit to counter the Great Recession. The loan spree raised credit from 100pc to almost 200pc of GDP (on IMF estimates), including off-books trusts, letters of credit and sub-radar loans from Hong Kong.

The 30pc annual pace of loan growth is unprecedented in any major country in modern history. It is double the pace of America’s housing boom and Japan’s Nikkei bubble in the late 1980s. It may match US loan growth in the late 1920s.

The Communist Party is now struggling to cope with the fall-out. On Monday, the state investment fund Central Huijin began buying stakes in China’s four top banks to restore confidence and halt the slide in share prices.

The relief rally ignited bank shares on Tuesday. Agricultural Bank of China surged 13pc in Hong Kong. Shanghai’s bourse jumped 4pc but is still down 60pc from its peak in late 2008.

China’s finance ministry is quietly intervening to underwrite China’s railway system. This behemoth is drowning with $300bn of debts after breakneck expansion, is in arrears on $25bn of debts to its two largest suppliers and has run out of money to pay workers on the Lanzhou-Chonqing rail project.

The ministry has offered a 50pc tax break on railway debt to be auctioned on Wednesday. This is a signal that Beijing will stand behind the system. It is intended to lure back investors following the high-speed rail crash in July

(Excerpt) Read more at telegraph.co.uk

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