This could be a good thing overall for China as the “alternative sources,” trusts, what is often called the “shadow banking system,” might actually be a stabilizing and limiting force in the economy. The rates of interest on loans through the shadow banking system are much higher than what municipalities can obtain through traditional lenders, and probably more accurately reflect the real risk of loans. (Which are considerable it appears.)
Economic information coming out of the ultimate crony capitalist state should always be taken with a grain of salt. If the official numbers say Chinese municipalities are in trouble and scurrying around for credit which is drying up, the unofficial numbers, the real numbers, the shadow numbers, probably tell an even more troubling story.
But to date the Chinese have been able to avoid going off the rails despite what appears to be widespread malinvestment spurred by a stimulus happy central bank. Maybe they can keep the balls in the air for a bit longer.
Why should we be concerned about widespread municipal defaults in China, aside from the general impact on the world economy anyway?
Because both China and Japan are facing serious economic challenges right now. Both countries don’t like each other and both have rising domestic social unease. Also both countries are looking beyond their post World War II spheres of influence.
When normally inward looking Asian countries start looking abroad for political and economic “solutions” bad things often occur.
“As banks tightened their purse strings, local governments had no choice but to resort to shadow banking and incur more expensive borrowing costs,” said Tang Jianwei, a Shanghai-based economist at Bank of Communications Co., the nation’s fifth-largest lender. “That will further constrain their repayment ability and eventually overwhelm some lower-level entities which have borrowed way beyond their means. I won’t rule out some defaults in 2014.”