Notes on China's Government Debt

In the November 2011 issue of Global Finance magazine, Thomas Clouse wrote an article about China's government debt.  As part of the stimulus plan enacted by Beijing, local governments must fund infrastructure and public projects.  Since they cannot issue bonds or levy property taxes, they use real estate to fund them.  Local government investment vehicles borrow money using the real estate as collateral.  Lately, the real estate market has been cooling down which will cause losses on these loans.  Who will take on the losses?  The banks, local governments or the central government.  There are $1.5 to $2.1 trillion in loans which is 70% of China's Gross Domestic Product.  Stephen Green of Standard Chartered Bank believes that the central government's balance sheet surplus and taxation authority can resolve this high level of debt without triggering a banking crisis - as long as there is strong nominal growth.