Subnational Government Debt Loans in China

Via Tyler Cowen, an anonymous “senior” Japanese official says:

In reality, China’s residential property bubbles are obvious. But the real danger lies elsewhere. So-called “loan platforms” established by local governments pose a much more serious risk. In the 1990s, China centralized its tax system and rendered local governments dependent on Beijing’s coffers. In order to make up the budget shortfall, local governments established these funding vehicles through which they can obtain commercial loans. In 2008, when Beijing mobilized a massive 4 trillion pump priming, it ordered local governments to bear one-third the cost themselves. This triggered a stampede. As of the end of June this year, there are 8,221 platforms and their outstanding loan balance is 7.7 trillion, of which 20 percent to 25 percent are deemed “problematic” by the China Banking Regulatory Commission.

Certainly something missed in many admiring columns about the quality of Chinese public infrastructure is the question of how, in detail, is this paid for. The answer seems to be a mix of bad loans and confiscation & resale of confiscated peasant agricultural land. But I’ve seen different takes on who’s ultimately left holding the bag at the end of the day. In principle, it seems to me that there are enough real profits being made in China to allocate losses without materially injuring the interests of most people. Michael Pettis, for example, says that in China “[i]f there is a real transfer of wealth and income from businesses and governments to households, even a rapid slowdown in GDP growth can be accompanied by a very small reduction in household income growth.” My guess, however, is that government officials and well-connected businessmen don’t like this plan!