China to Nullify Financing Guarantees by Local Governments

[ralph00]

http://www.bloomberg.com/apps/news?pid=20601087&sid=aIcTfdm5rWdY&pos=1

Thoughts? Looks to me like China has its own Fannie/Freddie type issue ...

China to Nullify Financing Guarantees by Local Governments

By Bloomberg News

March 8 (Bloomberg) -- China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.

The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as soon as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.

China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on local- government borrowing, estimated at about 24 trillion yuan ($3.5 trillion) by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad loans as projects are left without funding, Shih said this month.

“Beijing’s fiscal situation probably isn’t as good as it looks at first glance,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong. “Perhaps at some stage the central government is going to have to bail out the banks or the regional governments and take it on its own balance sheet.”

Click on link for rest of article ...

 

[Renegen]

Wow, it's good to be the king!

So first the government provides guarantees to facilitate loans to get the economy going.

Then they cancel the guarantees once it sees huge losses in the future. All the fools who took out the loans thinking their downside was backstopped by the government... will go bankrupt!

The snake is eating its own tail.. yeah it certainly looks bad for China.

 

[EMRGLOBAL]

http://www.ft.com/cms/s/0/6cd3a766-2925-11df-972b-00144feabdc0.html

China wants to step away from US currency Peg.

So let them. They are carrying a boat load of our debt...let their currency stand on its own.

If the dollar falls, so be it.

I doubt the long term effect on the dollar will be bad if china lets their currency float on its own.

I say, Do it China.

 

[nutmeg]

I thought I'd read something similiar about a year ago, then we heard nothing more about it.

 

[SomeYoungGuy]

Quote from nutmeg:

I thought I'd read something similiar about a year ago, then we heard nothing more about it.

Chinese gov't is very good at controlling information.

 

[Renegen]

Quote from nutmeg:

I thought I'd read something similiar about a year ago, then we heard nothing more about it.

Do you have a link? I'd like to read it.

Considering that the article says there are $3.5 trillion in funds borrowed to pay for local governments, this means that this current way of financing has been going on for a long time. It's quite possible the central government has tried to put a stop to the borrowing in the past.

However, it does still send bad signals that the central government doesn't feel good taking on some of the debt risks. A bad loan is a bad loan.

 

[nutmeg]

I looked around to figure out what I remember reading (article below). I guess my point is they can do whatever they like but I never did know the outcome of this

http://www.reuters.com/article/idUSSP47327420090831

BEIJING, Aug 31 (Reuters) - A report that Chinese state-owned companies will be allowed to walk away from loss-making commodity derivative trades provoked anger and dismay among investment bankers on Monday as they feared it may set a damaging precedent.

The State-owned Assets Supervision and Administration Commission, the regulator and nominal shareholder for state-owned enterprises (SOEs), told six foreign banks that SOEs reserved the right to default on contracts.

 

[SomeYoungGuy]

I'm hopelessly naive here, but do I have counterparty risk trading gold and wheat futures sitting here in my underwear? Or is this only a worry for some dark-pool international trading consortium that I'm not a part of?

 

[pitz]

Quote from SomeYoungGuy:

I'm hopelessly naive here, but do I have counterparty risk trading gold and wheat futures sitting here in my underwear? Or is this only a worry for some dark-pool international trading consortium that I'm not a part of?

Absolutely. At some point, the prices of those commodities will move so violently as to vastly exceed the daily margining requirements, either to the upside or to the downside, and counterparties will fail, setting off a contagion.

The only way you can ensure you will benefit from owning gold, is to actually own it (ie: take physical delivery), *or* the means of production (ie: buy gold equities). If you don't believe that gold is going to go up, then simply don't participate in the market, long or short.

Same with wheat. Financial intermediaries add no value, so, over the long term, their expected profits are equal to zero, which almost entirely manifests itself as tail risk. And those tails will show up eventually.

 

[Renegen]

Quote from SomeYoungGuy:

I'm hopelessly naive here, but do I have counterparty risk trading gold and wheat futures sitting here in my underwear? Or is this only a worry for some dark-pool international trading consortium that I'm not a part of?

My understanding is no. That's because your futures contracts are held at the CME for example. Your counterparty is the CME.