7 ms·

The article kind of assumes that you understand what these "local government financing vehicles" are. Which is probably true for the median reader of the story,

The article kind of assumes that you understand what these "local government financing vehicles" are. Which is probably true for the median reader of the story, but it wasn't true for me, so I went looking around for an explainer and found this from 2013: https://www.ibtimes.com/chinas-local-government-financing-vehicles-lgfv-7-things-you-should-know-about-chinas-1411694 https://www.ibtimes.com/chinas-local-government-financing-ve... In contrast to state governments in the U.S., most local governments in China are forbidden to borrow money directly. Historically, land sales have been a large revenue source for local governments, but since the global financial crisis this revenue source has diminished. Yet local government spending, especially on infrastructure investments, has accelerated... Detroit filed for bankruptcy with debts of $18 billion on July 18, but this is the average amount of debt for many Chinese cities. A 2012 audit of 36 local governments found $624.6 billion in debt -- suggesting there are at least a few Chinese cities with debt equal to, or in excess of, the $18 billion that sunk Detroit. So the news is that what was understood to be ~$625 billion in debt six years ago has turned into $5.8 trillion in debt today. Which is, like, 322 Detroits.

michaelgiba 8y ago
Wow.. thanks for putting this in perspective
fspeech 8y ago
If you want to compare numbers you need to know what metrics are used in each. Here is the S&P report that everyone's headline is based upon: https://www.spratings.com/documents/20184/0/ChinasHiddenSubnationalDebtsSuggestMoreLGFVDefaultsAreLikely.pdf/00c1bdd1-70c0-9240-12df-850df192c602 https://www.spratings.com/documents/20184/0/ChinasHiddenSubn... While it does not go back to 2012 I see nothing suggesting the kind of increase you are quoting. It is also difficult to compare the Detroit number to a Chinese city unless we know what are included in the numbers. Detroit doesn't own many of its infrastructure. For example its prison borrows separately, and so does its water and sewer district. Presumably comparable numbers are included in S&P's LGFV total.
TulliusCicero 8y ago
That's really interesting, but it's be nice to also know the average population of those cities. The per capita debt is probably the more relevant statistic. Or maybe the ratio between the debt and [assets/income] of the city.
- phkahler 8y ago
  The population of Detroit has dipped below 700,000 for a city of over 130 square miles. My understanding is that Chinese cities have quite high population density compared to that.
- microtherion 8y ago
  Exactly! There are more than 100 cities in China with a higher population than Detroit, and there are at least 15 cities with 10x the population of Detroit.
  - gph 8y ago
    Eh, I think both you and the poster below are making a mistake in using the population of the city center of Detroit. The city center is making a bit of a comeback, but the majority of the population lives in the surrounding metro area, which still has a population of roughly 3.7 million. And before you complain about that being a much bigger area, here's the land area for metro Detroit compared to some of China's biggest cities: Detroit metro: 1,337.1 sq mi Guangzhou Urban: 1,483.95 sq mi / ~11 million Shanghai Urban: 1,550 sq mi / ~24 million Chengdu Urban: 1,760.0 sq mi / ~11 million Chinese cities typically have boundaries roughly equivalent to US metro areas. They certainly have larger populations than Detroit, but not as much as you guys think. [1]https://en.wikipedia.org/wiki/Metro_Detroit https://en.wikipedia.org/wiki/Metro_Detroit [2]https://en.wikipedia.org/wiki/Guangzhou https://en.wikipedia.org/wiki/Guangzhou [3]https://en.wikipedia.org/wiki/Shanghai https://en.wikipedia.org/wiki/Shanghai [4]https://en.wikipedia.org/wiki/Chengdu https://en.wikipedia.org/wiki/Chengdu
    - sct202 8y ago
      But to be fair on the comparison of debt, the $14b debt was to the city of 700k people not to the metro area of 3.7m.
John_KZ 8y ago
These numbers are meaningless on their own. Detroit went up in flames when it lost it's auto industry. Otherwise the debt would just get bigger and Detroit would be fine. China might undergo a crisis when they start losing exports due to other countries re-industrializing (ie the US). My guess would be that they won't go into the red on average. Their growth will slow and some very export-oriented industrial areas will suffer, but their internal market is huge by now so they'll just keep growing, but not as fast.
panarky 8y ago
For the sake of argument, let's assume that the headline is true -- local governments have taken on more debt than they can service in a slowing economy. What's the endgame? Here are some possibilities, would love to see some economic modeling to quantify some scenarios. 1) Central government gradually inflates the currency to monetize the debt with a few defaults along the way. Damage is funded by Chinese creditors (defaults) and Chinese citizens (inflation), and it takes 20 years to fully play out. 2) Central government bails out bad loans by selling a portion of their $3T in foreign reserves, including $1T of US government debt. Chinese creditors, investors and citizens are made whole. Foreign bond prices fall and interest rates rise, causing recession and financial crisis in the US. 3) Central government bails out a few well connected players, but mostly allows market forces to run their course. Shadow banks and local government financing vehicles go bankrupt, causing a cascade of bankruptcies in the real economy, and economic growth is 200 basis points under potential until 2022.
- btown 8y ago
  In scenario (2), wouldn't Chinese companies be affected by the reduced demand from North America/Europe being in financial crisis? Is it understood that this would be devastating enough that China wouldn't use what is essentially a nuclear option?
  - panarky 8y ago
    This is why I'd love to see a quantitative model, there are too many players and too many variables for good intuition. What matters for each scenario is (a) how much it costs, (b) who bears the cost, and (c) how long it takes. If Chinese creditors, investors and citizens bear 100% of the cost in scenarios 1 and 3, but they only bear 30% of the cost in scenario 2, then scenario 2 is preferable isn't it? But what if Chinese citizens don't have a vote, and the damage to well connected elites is lower under scenario 1? Maybe that winds up the preferred course even if total cost is greater. Who knows without the ability to even roughly quantify the primary, secondary and tertiary effects?
    - deleted 8y ago
      [deleted]
late2part 8y ago
I wonder what “average amount of debt for many Chinese cities” is supposed to mean? The average for an arbitrary subset of the population?

michaelgiba 8y ago

Wow.. thanks for putting this in perspective

fspeech 8y ago

If you want to compare numbers you need to know what metrics are used in each. Here is the S&P report that everyone's headline is based upon: https://www.spratings.com/documents/20184/0/ChinasHiddenSubnationalDebtsSuggestMoreLGFVDefaultsAreLikely.pdf/00c1bdd1-70c0-9240-12df-850df192c602 https://www.spratings.com/documents/20184/0/ChinasHiddenSubn... While it does not go back to 2012 I see nothing suggesting the kind of increase you are quoting. It is also difficult to compare the Detroit number to a Chinese city unless we know what are included in the numbers. Detroit doesn't own many of its infrastructure. For example its prison borrows separately, and so does its water and sewer district. Presumably comparable numbers are included in S&P's LGFV total.

TulliusCicero 8y ago

That's really interesting, but it's be nice to also know the average population of those cities. The per capita debt is probably the more relevant statistic. Or maybe the ratio between the debt and [assets/income] of the city.

phkahler 8y ago
The population of Detroit has dipped below 700,000 for a city of over 130 square miles. My understanding is that Chinese cities have quite high population density compared to that.
microtherion 8y ago
Exactly! There are more than 100 cities in China with a higher population than Detroit, and there are at least 15 cities with 10x the population of Detroit.
- gph 8y ago
  Eh, I think both you and the poster below are making a mistake in using the population of the city center of Detroit. The city center is making a bit of a comeback, but the majority of the population lives in the surrounding metro area, which still has a population of roughly 3.7 million. And before you complain about that being a much bigger area, here's the land area for metro Detroit compared to some of China's biggest cities: Detroit metro: 1,337.1 sq mi Guangzhou Urban: 1,483.95 sq mi / ~11 million Shanghai Urban: 1,550 sq mi / ~24 million Chengdu Urban: 1,760.0 sq mi / ~11 million Chinese cities typically have boundaries roughly equivalent to US metro areas. They certainly have larger populations than Detroit, but not as much as you guys think. [1]https://en.wikipedia.org/wiki/Metro_Detroit https://en.wikipedia.org/wiki/Metro_Detroit [2]https://en.wikipedia.org/wiki/Guangzhou https://en.wikipedia.org/wiki/Guangzhou [3]https://en.wikipedia.org/wiki/Shanghai https://en.wikipedia.org/wiki/Shanghai [4]https://en.wikipedia.org/wiki/Chengdu https://en.wikipedia.org/wiki/Chengdu
  - sct202 8y ago
    But to be fair on the comparison of debt, the $14b debt was to the city of 700k people not to the metro area of 3.7m.

John_KZ 8y ago

These numbers are meaningless on their own. Detroit went up in flames when it lost it's auto industry. Otherwise the debt would just get bigger and Detroit would be fine. China might undergo a crisis when they start losing exports due to other countries re-industrializing (ie the US). My guess would be that they won't go into the red on average. Their growth will slow and some very export-oriented industrial areas will suffer, but their internal market is huge by now so they'll just keep growing, but not as fast.

panarky 8y ago

For the sake of argument, let's assume that the headline is true -- local governments have taken on more debt than they can service in a slowing economy. What's the endgame? Here are some possibilities, would love to see some economic modeling to quantify some scenarios. 1) Central government gradually inflates the currency to monetize the debt with a few defaults along the way. Damage is funded by Chinese creditors (defaults) and Chinese citizens (inflation), and it takes 20 years to fully play out. 2) Central government bails out bad loans by selling a portion of their $3T in foreign reserves, including $1T of US government debt. Chinese creditors, investors and citizens are made whole. Foreign bond prices fall and interest rates rise, causing recession and financial crisis in the US. 3) Central government bails out a few well connected players, but mostly allows market forces to run their course. Shadow banks and local government financing vehicles go bankrupt, causing a cascade of bankruptcies in the real economy, and economic growth is 200 basis points under potential until 2022.

btown 8y ago
In scenario (2), wouldn't Chinese companies be affected by the reduced demand from North America/Europe being in financial crisis? Is it understood that this would be devastating enough that China wouldn't use what is essentially a nuclear option?
- panarky 8y ago
  This is why I'd love to see a quantitative model, there are too many players and too many variables for good intuition. What matters for each scenario is (a) how much it costs, (b) who bears the cost, and (c) how long it takes. If Chinese creditors, investors and citizens bear 100% of the cost in scenarios 1 and 3, but they only bear 30% of the cost in scenario 2, then scenario 2 is preferable isn't it? But what if Chinese citizens don't have a vote, and the damage to well connected elites is lower under scenario 1? Maybe that winds up the preferred course even if total cost is greater. Who knows without the ability to even roughly quantify the primary, secondary and tertiary effects?
  - deleted 8y ago
    [deleted]

late2part 8y ago

I wonder what “average amount of debt for many Chinese cities” is supposed to mean? The average for an arbitrary subset of the population?