We no longer check to see whether Telegraph.co.uk displays properly in Internet Explorer version 6 or earlier.
To see our content at its best we recommend upgrading if you wish to continue using IE or using another browser such as Firefox, Safari or Google Chrome.
Accessibility links
Sunday 18 September 2011
| Subscribe
Telegraph.co.uk Home News Sport Finance Comment Blogs Culture Travel Lifestyle Fashion Tech Dating Offers Jobs Companies Comment Personal Finance Economics Markets Your Business Olympics Business Business Club Money DealsChina business
China 'faces subprime credit bubble crisis' Monetary tightening in China threatens to pop the $1.7 trillion (£1.07 trillion) credit bubble in local government finance and expose the country's simmering "subprime" crisis, according to the Communist Party's economic guru. Mr Cheng said China is entering a "very tough period" as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice.7:00PM BST 17 Sep 2011
Comments
Cheng Siwei, head of Beijing's International Finance Forum and a former deputy speaker of the People's Congress, said interest rate rises and credit curbs to cool overheating were inflicting real pain on thousands of companies used by local party bosses to fund the construction boom.
"The tightening policy is creating a lot of difficulties for local governments trying to repay debt, and is causing defaults," he told a meeting at the World Economic Forum in Dalian. "Our version of subprime in the US is lending to local authorities and the government is taking this very seriously."
"Everybody assumes that they will be bailed out by the central government if they default, but I disagree with this. It means that the people will ultimately pay the bill for it all, at a cost to the broader welfare."
"Those who are not highly indebted are forced to help those who are," he said, echoing the debate over moral hazard that has divided opinion in the West since the banking rescues.
Local governments have created more than 6,000 arms-length companies to circumvent restrictions on bond issuance, creating a huge patronage machine for party bosses that has largely escaped central control.
Related ArticlesChina risks hard landing as global woes spread
15 Sep 2011China wants to break the ultimate taboo
14 Sep 2011China states price for Italian rescue
14 Sep 2011JLR in talks over Chinese joint venture
13 Sep 2011ICB will likely pass into history as a white elephant
13 Sep 2011China inflation cools as food price rises slow
09 Sep 2011The audit office said the loans have reached $1.7 trillion (£1 trillion). While some of the money has been used to finance much-needed investments in water systems and roads, a large part has fuelled unbridled construction with a dubious rate of return.
The local governments depend on land sales for 40pc of their revenue so the process has become incestuous and self-feeding. Such reliance on property sales revenues has greatly aggravated the post-bubble crisis in Ireland.
Mr Cheng said China is entering a "very tough period" as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice. "The inflation rate and the growth rate are conflicting with each other: it is very troubling," he said, describing what is known to economists as the Phillips Curve dilemma.
window.fbAsyncInit = function() { FB.init({ status : true, cookie : true, xfbml : true, channelUrl : 'http://www.telegraph.co.uk/template/utils/fb_xd_channel.html' }); }; (function() { var e = document.createElement('script'); e.async = true; e.src = document.location.protocol + '//connect.facebook.net/en_US/all.js'; document.getElementById('fb-root').appendChild(e); }()); .at15t_email {display:none !important;} ul li.email span.at300bs {display:none !important;} // Preload images var closeOnHover = new Image(); closeOnHover.src = "/template/ver1-0/i/addthis_menu_close_active.gif"; var menuTop = new Image(); menuTop.src = "/template/ver1-0/i/addthis_menu_top.png"; {parsetags: 'explicit'} X Share & bookmark Delicious Facebook Google Messenger Reddit Twitter Digg Fark LinkedIn Google Buzz StumbleUpon Y! Buzz What are these? Share: Share Tweet http://www.telegraph.co.uk/finance/china-business/8770945/China-faces-subprime-credit-bubble-crisis.html Telegraph China business Finance » Ambrose Evans-Pritchard » Economics » Financial Crisis » Business Latest News »In China business
CameChina business
7:00PM BST 17 Sep 2011
Comments
Cheng Siwei, head of Beijing's International Finance Forum and a former deputy speaker of the People's Congress, said interest rate rises and credit curbs to cool overheating were inflicting real pain on thousands of companies used by local party bosses to fund the construction boom.
"The tightening policy is creating a lot of difficulties for local governments trying to repay debt, and is causing defaults," he told a meeting at the World Economic Forum in Dalian. "Our version of subprime in the US is lending to local authorities and the government is taking this very seriously."
"Everybody assumes that they will be bailed out by the central government if they default, but I disagree with this. It means that the people will ultimately pay the bill for it all, at a cost to the broader welfare."
"Those who are not highly indebted are forced to help those who are," he said, echoing the debate over moral hazard that has divided opinion in the West since the banking rescues.
Local governments have created more than 6,000 arms-length companies to circumvent restrictions on bond issuance, creating a huge patronage machine for party bosses that has largely escaped central control.
China risks hard landing as global woes spread
China wants to break the ultimate taboo
China states price for Italian rescue
JLR in talks over Chinese joint venture
ICB will likely pass into history as a white elephant
China inflation cools as food price rises slow
The audit office said the loans have reached $1.7 trillion (£1 trillion). While some of the money has been used to finance much-needed investments in water systems and roads, a large part has fuelled unbridled construction with a dubious rate of return.
The local governments depend on land sales for 40pc of their revenue so the process has become incestuous and self-feeding. Such reliance on property sales revenues has greatly aggravated the post-bubble crisis in Ireland.
Mr Cheng said China is entering a "very tough period" as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice. "The inflation rate and the growth rate are conflicting with each other: it is very troubling," he said, describing what is known to economists as the Phillips Curve dilemma.
In China business
Best deals from travelzoo
Finance Most Viewed
offers from amazon
MORE FROM TELEGRAPH.CO.UK
Back to top
Hot Topics
© Copyright of Telegraph Media Group Limited 2011
Terms and Conditions
Today's News
Archive
Style Book
Weather Forecast
Read Full Article »