Are The Chinese Feeding It to the Fishes Again – High Finance and China’s Municipal Vehicles

One of the most important things in securing or raising capital is investor confidence. A high level of investor confidence can come in a number of ways. Strong quarterly sales, a positive outlook, a good credit rating, and legitimate accounting are some of the best ways. It also pays to have strong financial backers behind any of the offerings. But what happens when a government, corporation, or municipality takes advantage of the investors, trying to score large sums of capital, through trickery, fakery, and behind the scenes corruption?

Well, welcome to China’s capital markets. You see, behind the 10% year-over-year growth for the last three decades, not all is as it seems. That Great Wall of China may not be on a solid financial foundation unfortunately. After the global recession, China used stimulus monies by making possible loans through municipal vehicles for huge infrastructure projects, which put people to work building giant high-rises, power plants, dams, bridges, high-speed trains, and other things. Many applauded this effort, but in hindsight it wasn’t done on the up and up.

In China Economic Review there was an interesting article published on August 16, 2011 titled; China Downplays Local Debt, Renews Push for Bonds,” which also quotes a Bloomberg BusinessWeek article about talking about how the Chinese Ministry of Finance is claiming that the local government municipal vehicles are safe from loan defaults, and won’t cause a spike in bad loans. In reality this is a huge problem, it isn’t going away, much of the collateral of so many of these loans for malls, infrastructure, high-rise apartments doesn’t exist, and never did exist, all that exists is empty paper loans and a trail awash of corruption cover ups.

This particular article in China Economic Review stated that the Chinese Ministry of Finance is putting together a plan to allow these local governments to sell “bonds” to shore up the challenges they face with their bad loans. Approximately $1.7 Trillion in loans were made in 2010, and S&P now says some 30% maybe bad according to the article. “The finance ministry has drafted a preliminary plan that would allow designated provinces and cities to sell bonds to investors on a trial basis” a person with knowledge of the matter said.”

There was another article by Tom Orlick on August 15, 2011 in the Wall Street Journal titled “China’s Official Data Muddy Its Housing Picture,” and the article was accompanied by a couple of graphs which show the difference between China’s National Bureau of Statistics and the private estimates of China Real Estate Index System. The figures were off by so much that it was obvious that someone wasn’t telling the truth. The question to me is not which one, rather it is; why the Chinese government is putting out false statistics to stave off a total financial real estate market catastrophe.

Things in China are not as they seem, and the troubles have been exacerbated by a false sense of economic prosperity which has created an incredible real estate bubble, all backed by bogus loans, and corruption behind the scenes. When all of this collapses it won’t be pretty, but it may be a while still, as China tries to shore up its problems, by selling more bonds to cover its losses. It’s too bad China did not learn from what the United States went through. Indeed I hope you will please consider all this and think on it.