MonitorZombie China assets threaten lenders

Last month Zhang Ke, the boss of accounting firm ShineWing, gave voice to fears shared by an increasing number of people.

China's local government debts were "out of control", he told the Financial Times newspaper, and warned of a looming crisis.

What's got Zhang running scared is not the debts owed directly by China's municipal authorities, but rather the debts accumulated by local government-owned investment companies.

Local authorities are forbidden from borrowing directly in the capital markets, so back in 2009 when Beijing ordered an all-out stimulus effort to counter the effects of the international financial crisis, provincial, county and city governments set up thousands of companies to fund their infrastructure development projects.

Initially, these companies, or local government financing vehicles as they are often called, relied on bank loans to raise their money. Recently, however, they have broadened their funding sources, issuing corporate bonds, borrowing through trust companies and selling "wealth management products" to private investors in search of yield.

Estimating how much they have borrowed by these means is tricky. In a report published last week, analysts at the Hong Kong office of Malaysian-owned bank CIMB estimated that total Chinese local government debts, including those owed by their investment companies, hit 15 trillion yuan (HK$18.7 trillion) last year, or 29 per cent of China's gross domestic product.

Paying those debts back, or even just meeting the interest payments, is going to be difficult. CIMB's analysts looked at a sample of 809 local government investment companies, and found that only 31 per cent generate enough cashflow to cover their debt service obligations. Most don't even come close.