Finally, I wish to come to the tricky part of this story in
regard to the unshaken belief in China. Bo Xilai pushed Chongqing’s economy
hard for his political campaign to enter the circle of leadership of the
communist party in Beijing. His investment policies were based on support
programs for the inland provinces in opposition to the rather developed coastal
provinces. Due to the success of this
project, he also made use of quite questionable investment vehicles to keep
Chongqing going. The steady inflow of money and investment projects produced
quite a hike in the real estate of that region, which Bo utilised for his
investment policy. He backed his loans through the governmental real estate
assets, while he firmly believed in its rising value. This strategy is alright, if investments are driving your real estate prices up, but it can be
devastating when the investments slow down or come to a complete stop. Looking at the most recent news, China's foreign direct investment as well as other economic indicators are falling for the last six months.(The Wall Street Journal 15 May 2012: China Foreign Investment Falls Again) Obviously, we have to consider the situation in Europe and the US, which is threatening enough, but what if China goes down?
The Chongqing Scenario
| Chongqing skyline |
Currently, Chongqing is said to be
burdened with about USD 30 billion. At this point, it is getting interesting to me,
as people love to look at China as the stable and growing giant. What happens if China's growth is slowing down? We see more cities in trouble, since FDI will fall, factories are closed and all of this is quite likely in the current economic situation. Only Chongqing
suffers from USD 30 billion, but what about the the rest of China. All
provinces are very competitive and their leaders need to achieve certain goals
to further their careers. On top, the local governments have a lot of freedom
in regard to their fiscal and budgetary policies. Bo Xilais story is an
extreme, I agree. Still, the debt risk is rising. Just assume an overal debt of USD 1 billion per 1 million citizens in a city. There are about 160 cities with more than 1 million citizens. I am sure you can do the maths, but keep in mind that there are many cities with more than 1 million and another 500 cities with 100,000 and above. Besides, we are only talking about the communal level. Certainly, there is no proof for this assumption, which is why I call it a scenario. The PR China does not really let us look into their books, but there is more to this issue. A last comment below.
China’s banking system is just another time-bomb of nonperforming loans (NPL). Many experts assume
that China’s banks intended to list themselves on international stock exchanges to collect
fresh money and cover the domestic NPLs. Basically, that is what they did during the last few years. Some weeks back, Reuters updated on this issue and mentioned that several banks are struggling with rising NPLs, again. And again, the main beneficiaries were local governments and the real estate sector. Does that ring a bell? (Reuters 29 March 2012: Update 2 Nonperforming loans tick higher at Chinese banks)
Stay tuned for my next story, coming back to Malaysia and ASEAN. Be smart and diversify.
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