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August 02, 2011

"A Must-Read Report On China's Municipal Debt Problem"

My suggestion: be really careful before investing in China.


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I read a similar if not more frightening article in the NYT ("Building Boom in China Stirs Fear of Debt Overload", 6 July 2011) which says total municipal debt could be as high as $3 trillion in China with high likelihood of default. If most of the debt is issued by state banks and the loans fail, then what? I've read other articles saying this has happened previously (on a much smaller, yet still significant scale) and the banks essentially just removed the debts from their books. I would think it just makes the municipal development subsidized by the government. Some bankers or mayors will probably be accused of corruption and executed, followed by stricter municipal loan requirements. The one thing I've learned living here for the past 3 years is that Chinese economics is vastly different than anything we are familiar with in the West.

I would really like an explanation to the "then what" question.


Is this sort of like the Japanese propping up "zombie banks" since the middle 90s or so? How long can it go on? I really don't have a clue as to "then what".

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