Last year, during one of the periodic spasms of the European debt crisis, China played down hopes that it might help out some of the PIIGS, the eurozone’s most indebted countries – Portugal, Ireland, Italy, Greece and Spain. The suggestion was that Europe needed to get its own house in order first.
A year on and observers are turning their attention to the finances of scandal-ridden Chongqing. There are fears that Bo Xilai’s departure may uncover a place similarly mired in unsustainable debt.
“I don’t think it would be a stretch to say that the Chongqing local government, state-owned enterprises and state-owned developers collectively owed Rmb1 trillion ($159 billion) at the end of 2011,” Victor Shih, assistant professor of political science at Northwestern University, told the Wall Street Journal.
If Shih’s numbers are accurate, it would make Chongqing’s local debt equivalent to 100% of the city’s gross regional product. This would put the city on a par with Ireland and Portugal – both with debt at around 105% of GDP – and higher than Spain’s 79.8%.
Under particular scrutiny are the liabilities of Chongqing’s investment vehicles, the entities used to finance infrastructure and other projects designed to boost economic growth. Since Bo Xilai took over as Party secretary in Chongqing in 2007, 10 major investment vehicles have more than doubled their liabilities to Rmb346 billion, the WSJ reports, based on its own research.
These new numbers cast doubt over the claims of Chongqing officials that the city’s finances are in order (see Talking Point, WiC146).
The central government needs reassurance too. Sasac, the government body in charge of China’s largest state-owned firms, recently sent out requests to a number of companies in Chongqing, asking them to report on their financial situation, reports the Hong Kong newspaper Wen Wei Po.
At the same time, shares in Hong Kong-listed Chongqing Rural Commercial Bank (CQRC) plummeted by more than 14% on Monday and Tuesday last week. Investors may well have been unnerved by the possibility that Sasac’s investigations will uncover further irregularities in Chongqing, which could translate into non-performing loans at the local bank.
The bank hit back by claiming that its loan book is in good shape, and that it has been reducing its exposure to local government debt: “Almost all our local government loans are backed by sufficient cashflows,” a representative told Reuters. “Loan quality is excellent, and we have been consistently cutting our exposure to higher-risk lending.”
The bank’s stock then managed to regain some ground. But its shares started to fall again after it released its results for the first quarter of the year. Profit growth was slower than in the same period last year, prompting a 4.35% drop in the stock on Monday.
CQRC went public in late 2010, and analysts at the time highlighted its exposure to the rapidly-growing Chongqing economy as part of its appeal. But in the current climate this geographical focus is proving to be more of a curse: “The Bo Xilai scandal casts a pall over everything in Chongqing right now,” one analyst told Bloomberg. “The few foreign investors holding [CQRC] are rushing to sell as a result.”
Other Hong Kong-listed companies with exposure to Chongqing, such as property developer CC Land or the Sichuan Expressway Company have also suffered from falling share prices since the Bo scandal started to take hold in early March.
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