Summary:
“Many of the stimulus projects undertaken this past year have been financed, not by the central government directly, but by local governments, including cities, counties, and provinces….local governments have already accumulated RMB 11 trillion (US$ 1.7 trillion) in outstanding debt, with RMB $13 trillion (US$ 1.9 trillion) in available credit lines, belying China’s low reported levels of public debt. …these debts are supposedly guaranteed by the local governments [so] banks and other lenders tend to treat the loans as essentially risk-free.” Top regulators in Beijing now report that “China plans to nullify all guarantees local governments have provided…” “…their credit was worthless without the guarantee”
Bottom line: China is simply playing the same game of “let’s find the greatest fool” that western banks have been playing. They just tell people whatever they want to hear no matter how fantastical it really is because people want to believe, need to believe. Why do these con games continue to work even after Bear Sterns and Bernie Madoff? 2 main reasons IMO: First, there is so much funny money running around that it needs to go somewhere. Unlike real money like gold and silver, funny money is no use locked in a vault. It needs to be out there being invested (gambled with) because unlike real money it loses value each year in aggregate and there is always the risk of a sudden and catastrophic drop in value such as happened to Iceland last year (50% devaluation literally overnight). Their equivalent 401ks turned into 201ks with the snap of a finger and there was nothing they could do about it because their money was locked up out of their reach in a government controlled retirement system. Sound familiar? Money managers know that holding fiat money is like holding a hot potato. If you hang on too long you might get burned.
Second, too many people rely on returns from their investments in order to live. They are either retired (think boomers) or are simply rich and count on the interest payments to provide perpetual income without the need for them or anyone in their family to work again, ever. That may sound normal to a lot of people but it is the recipe for an unworkable economy IMO. Nobody should be allowed to live a massive life without work – it is simply not what nature intended for us and it means that everyone else has to work harder in order to support the consumption of those who are not working. It might be hard for most people to fathom this simple concept but in reality there is no free lunch so if someone appears to be getting free lunch then rest assured that someone else is paying for it with their work even if they don’t understand the fact.
Perhaps the most interesting aspect of this story is the fact that China appears to be telegraphing the pull out of their government guarantees at a time when most other governments are scrambling to provide additional guarantees. IMO this probably means that China is overheating. There is too much malinvestment happening in the country and it is creating too many bubbles. Such bubbles raise prices on assets which makes them too expensive for the locals to purchase leading to the creation of empty mega cities and empty mega malls. If the Chinese government does indeed nullify these guarantees it will result in a sudden stop of capital coming into that country and it might even trigger a mass exodus.
