Monday, June 6, 2011

China Pumps in Cash to Wipe out Bad Debts

Re-capitalization begins in China.

China to clean up billions worth of local debt
China’s regulators plan to shift two to three trillion yuan ($308-$463-billion U.S.) of debt off local governments, sources said, reducing the risk of a wave of defaults that would threaten the stability of the world’s second-biggest economy.
Sounds like a straight-up bank bail out on the face of it given the counterparty risks. Local governments cannot issue bonds (although that may change, according to the article).

As part of Beijing’s overhaul of the finances of heavily-indebted local governments, the central government will pay off some of their loans and state banks including some of the “Big Four” will be forced to take some losses on the bad debt . . .
If true, perhaps not a pure bank bailout. Or perhaps they just can't handle a straight bailout this round. It's a little harder to bail out bad behavior with profits from exports when the loans are reaching Western levels.

With sterilization becoming increasingly expensive, China may feel a pinch as bailouts continue.

1 comment:

jesse said...

It's a good question to ask: if a bank is being "bailed out" on one side, what is it doing on the other? Is it business as usual or are they cutting off lending?