How Much Longer Can China's Debt Bubble Continue?

China: Waist Deep In Debt from the Financial Post

While investors around the world remain fixated on the rampant fiscal and economic problems of the United States and Europe it turns out China, the country the rest of the world is depending on to drive growth, has some serious debt problems of its own.
Benjamin Tal, deputy chief economist with CIBC World Markets, said the debt-to-GDP ratio for China may be north of 50% — almost double the official figures — once the off-balance-sheet debt of local governments is taken into account.
“Some provinces in China sit on debt ratios that make Greece look good,” he said.

However , a report from Reuters last week said Beijing was looking at a workaround to the potential debt time bomb, agreeing to shift 2-trillion to 3-trillion yuan ($300-billion to $450-billion) of debt off local government balance sheets in an effort to prevent a wave of defaults.
The central government also appears ready to lift restrictions preventing local governments from selling bonds, while state banks will likely be pressured to write off some of the loans.
“We’re still calling for a soft landing rather than a hard landing for China. I hope we’re right, because if it is a hard landing everybody will feel it, including Canada,” Mr. Tal said in an interview. “The beauty of China is the government can just implement policies. They are very effective in manipulating the economy and we’re seeing that.”

Whether or not China can manipulate the economy into a soft landing rather than a hard landing remains to be seen.  We do know that the 2 largest economies ( US and Japan) of the last 3 decades threw everything they had a various bubbles that burst to no avail. 


 Here is one of the smartest Economists on the planet and his take on China.
China's Bad Growth Bet by Nouriel Roubini
 A couple of key points

China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium.

China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-2009 from 11% of GDP to 5%, China’s leader reacted by further increasing the fixed-investment share of GDP from 42% to 47%.

Thus, China did not suffer a severe recession – as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009 – only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50%.

The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

We all know what the popping of China's debt bubble would do to resources in this province.   It is just a question of when.

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