WSJ : Surprise, China’s Sovereign Debt Multiple Times Number Listed

March 9, 2011

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As we and others have stated, China’s sovereign debt level, listed at 17% compared to 90% in the US, is a farce and the mainstream press is finally waking up to it.

“Stephen Green, China economist at Standard Chartered Bank, estimates total debt, including contingent liabilities, at 77% of GDP. Arthur Kroeber, managing director of Beijing-based research firm Dragonomics, puts the total debt at 75% of GDP.”

“”The alarming thing is that no one, not even the central government, knows how much debt there is in the system,” says Victor Shih, a professor at Northwestern University who has studied the issue.”

The themes are familiar to readers of HistorySquared :

  • Local government debt hidden in shell entities and not counted
  • Non performing loans are being hidden and not counted.
  • Debt of State Owned Enterprises is not counted.
  • Contingent Liabilities on the banking system are not counted.

On the upside, tax revenue is growing quickly.

“If China’s local governments can’t pay their debts, the central government will either have to bail them out directly, or take losses in the state-owned banking system.”

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Source : WSJ

HistorySquared :

Mark Hart, who started a fund dedicated to betting on a crises, pegs the debt potentially as high as 200% of GDP

The point being that China is just as much at risk of a sovereign debt crises as many others – perhaps more, as their debt situation is not known. At least in the US, people know the debt situation.

If and when they have a recession and banking crises, Non Performing loans on the government directed projects will begin to unmask the true debt situation and like Russia, will catch many by surprise.

In terms of trading ideas, one has to choose whether to target interest rates in China or the banking system, which will likely be bailed out. We suspect that whichever would make foreigners suffer the most will share the bunt of the burden.

further reading :

China : The Emperor Wears No Clothes.

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