Just last week, Patrick Chovanec was warning about the looming need to roll over debt in China:
Chovanec tells Nouriel Roubini the conflict between driving growth through investment-directed credit, and the resulting inflation problem, is being brought to the fore by looming debt maturities:
“…the thing that’s really intensifying that is the need to roll over debt. No longer are we talking about bad debt as a theoretical possibility, we’re talking about it as a real thing that needs to be dealt with within the system, and it’s eating up the available credit within the system. So, if you want to drive growth, you have to do it through credit expansion, if you expand credit, then you’re creating inflation. And that trade-off has become much more intense than it was a year ago, two years ago.”
In Monday’s FT:
China has instructed its banks to embark on a mammoth roll-over of loans to local governments, delaying the country’s reckoning with debts that have clouded its economic prospects.
Since the principal on many of the loans is not repayable, banks have started extending maturities for local governments to avoid a wave of defaults, bankers and analysts familiar with the matter told the Financial Times. One person briefed on the plan said in some cases the maturities would be extended by as much as four years.
While some analysts have warned that many loans will still go bad and that a roll-over only postpones the problem, government advisers believe that it will give Beijing time to find a more permanent solution to its debt troubles.
Of course they do.
Actually there’s some positive news in the above report, in terms of rebalancing — the roll-overs won’t be carte blanche, apparently, and one of the tests is that they should only apply to debts for projects which were based on real demand.
Who knows how well this will be adhered to, but it’s a reminder that there are elements within the Chinese government who support some sort of action to address the problem of uneconomic, credit-driven infrastructure investment.