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China’s trillion-dollar problem

world Updated: Mar 19, 2010 01:12 IST
Reshma Patil
Reshma Patil
Hindustan Times
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Tourists from India to China gaze at the towering skylines and massive bridges, highways and airports from the boomtowns to neat new cities and exclaim why India can’t do just the same.

But critics now point out that while India is building less, China is building — and borrowing — excess. Several of those skyscrapers and industrial zones are empty.

Many new ‘cities’ are still ghost towns with buildings but no local bustle.

This week, an analyst from Northwestern University in Illinois, US, stopped by Beijing to share his findings on China’s local debt burden.

Chinese local governments will sell vast land to repay banks for financing this building boom. Beijing, he said, would be forced to sell 90 sq km in the coming years. “To repay the debt, the governments will have to sell millions of hectares and force tens of millions of urban residents from their homes in the coming years...there’s no speculation,’’ said Victor Shih, assistant professor of political science at Northwestern University, at a media talk.

Last year, while the world slowly recovered from the recession, the Chinese economy grew fastest at 8.7 per cent.

The growth was pushed by a record 4 trillion yuan stimulus — about 20 times the size of India’s stimulus — of which the central budget financed a quarter. Since late 2008, local governments went on a project-planning spree. Shih estimates these governments set up 8,000 local investment companies and provided land as collateral to borrow loans amounting to 11.4 trillion yuan (1.7 trillion dollars) by 2009. He estimated that a quarter of the loans are bad debt.

China holds the world’s largest foreign exchange reserves exceeding 2 trillion dollars. But Shih put the figure in perspective and said it won’t seem large when compared to China’s local debt. “The banking system will bear the brunt of this fallout necessitating a massive bailout from China’s budget and foreign exchange reserves,’’ he said.

In 2009, Chinese banks lent a record 9.5 trillion yuan, sparking concerns of a property bubble. This year’s loan target is 7.5 trillion yuan and banks are being warned to lend carefully.

Forecasts for China’s economy continue to be robust, but with cautionary signs.

This week, the World Bank said the Chinese economy would grow 9.5 per cent in 2010. The Bank warned that ‘strained local government finances’ are a big risk.