Adding up China's debt to rein it in
Comment of the Day

July 31 2013

Commentary by David Fuller

Adding up China's debt to rein it in

Here is a section from this informative column by James Saft, first published by Reuters under a different title from the above, which the International Herald Tribune introduced
Reuters) - Like William the Conquerer before him, Premier Li Kequing is initiating his own Domesday survey in China, and this time the attempt to curb local abuses of power will have global economic consequences.

China's State Council, chaired by Premier Li, has ordered the National Audit Office to begin auditing what could total $2 trillion or $3 trillion of debt taken on by local governments.

The Audit Office will suspend other work and give all staff "crash" training so that auditors can begin fanning out across the country this week, according to a report by the state-run People's Daily.

The clear implication is that China is seeking to rein in local governments, which have helped along what is clearly a boom and may be a bubble by borrowing and spending freely on local development. For China, this will act as another brake on already slowing growth. For the rest of the world, it means less demand, especially for the kinds of raw materials and energy which go into real estate development and infrastructure .

David Fuller's view What China's new government is doing is positive for the longer term but a headwind which has slowed its economic juggernaut at a time when the world's other powerful regions are also underperforming.

However, most stock markets have done reasonably well since 2008, as companies became more disciplined and monetary policy has been a powerful tailwind. Corporate Autonomies have done particularly well, standing astride a more open global economy which is contributing to their GDP growth and profits.

China (weekly & daily) is a notable exception and has been a serial underperformer since its version of quantitative easing introduced at yearend 2008 was reined in mid-2009, to head off another round of real estate and stock market bubbles which it last saw in 2007. Valuations are much more attractive today but China's stock market will not be able to sustain another bull market until the central government feels satisfied that local government excesses are under control.

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