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“Critical” Debt “Domino Chain” Threatens To Destabilize China’s Financial System, SocGen Says

June 26, 2015

“Critical” Debt “Domino Chain” Threatens To Destabilize China’s Financial System, SocGen Says

Since the beginning of March when we first explained why QE (or at least some manner of “unconventional” monetary policy) may be inevitable in China, we’ve tracked developments around the country’s local government debt refi effort closely. For those in need of a refresher, we’ve documented the program from inception to implementation and beyond in exhaustive detail in the following posts:

While we won’t endeavor to recap the entire series of events here, note that the entire effort comes down to one simple thing: China’s local governments have managed to accumulated a debt pile worth 35% of GDP via off-balance sheet, high-cost loans which are now being swapped for low interest muni bonds in an effort to reduce debt servicing costs and extend WAM. This is part of a wider effort on China’s part to deleverage an economy laboring under $28 trillion in debt. This deleveraging effort goes far beyond local government debt, as Beijing is now moving to allow for more corporate defaults as the country moves to liberalize its financial markets.

There’s a critical link between local governments’ off-balance sheet financing (the loans that China is now working to restructure) and China’s financial system as a whole.

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