China Kicks the Can Again

02/13/2012 5:20 pm EST


Jim Jubak

Founder and Editor,

The government debt rollover plan should keep business running as usual for most of this year, writes MoneyShow’s Jim Jubak, who also writes for Jubak’s Picks.

Why didn’t the US Federal Reserve think of this? The Fed could have fixed the US real estate bust with one stroke.

Today, February 13, China has told its big government-controlled banks (sorry, private shareholders) to roll over loans to local governments.

That means local governments that borrowed from the banks to pay for the 2008 stimulus plan—ordered by Beijing and to finance everything from factories to roads to apartment complexes to shopping malls, to the tune of 10.7 trillion yuan ($1.7 trillion)—won’t have to pay back those loans as they mature over the next three years.

That’s really good news for cash-strapped local governments, which don’t have the money to pay off those loans—about half of that $1.7 trillion in loans is projected to come due over the next three years—and for China’s banks, in the short run, since they won’t need to declare trillions of yuan in bad loans.

It looks like today’s announcement represents a defeat for the China Bank Regulatory Commission, which had been insisting, through the middle of 2011 at least, that local governments had to pay back their loans in full and on time—and that if they didn’t, banks had to recognize a bad debt.

In the short term, the extension of maturities will make the balance sheets of China’s big banks even harder to understand, since the difference between good and bad loans won’t be a matter of cash flow and payment schedules, but of government fiat. There’s worry that even if the big banks don’t declare bad loans, they’ll know they’re building up in their loan portfolios, and will consequently cut back on lending.

With Beijing set to increase its quotas for new bank loans in 2012, I think that is a largely misplaced worry. Bank management knows that the government wants them to increase lending to boost economic growth, and that’s what they’ll do—whatever their own reservations.

Like the US deficit deal, which pushed budget cuts out into 2013, and like the Greek debt deal now in front of Eurozone finance ministers, this loan extension in China isn’t a fix of anything. It simply kicks the problem down the road.

That’s probably enough for global stock markets over the next nine months or so.

Maybe the world’s central banks could start printing "What, me worry?" on their stationery.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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