Credit: from crunch to crash – Victor Shih

Zhu Rongji via Wikipedia

China’s efforts to stop irresponsible local lending has changed into an ‘all out’ credit line for local governments, writes Victor Shih, assistant professor in political science, in an opinion piece for the Wall Street Journal. Even compared to the financial rescue offered at the end of the 1990s when the Asian crisis hit the region, the current package is unprecedented:

In contrast, the current central stimulus package of four trillion yuan ($586 billion) is a side show compared to the 20-plus trillion yuan in investment planned by local governments. For some reason, Beijing has shown little willingness to constrain fantastical local investment plans. The National Development and Reform Commission (NDRC), previously a bastion against uncontrolled local investment, has shown nothing but great enthusiasm for approving local construction projects. The NDRC even has devised ways to allow local governments to borrow more by using long-term loans from policy banks or bond issuance as the 30% required initial capital. Local governments then can borrow the rest from commercial banks, effectively financing some projects entirely with debt.

China’s banks, responsible for much of the credit, have plunged into a mode of uncontrolled lending, quitting a tradition of rather prudent spending:

An often overlooked ingredient to China’s success story is that generations of top-level central technocrats like Chen Yun, Yao Yilin and Zhu Rongji time and again used their political influence to constrain local investment bubbles, thus forestalling high inflation and major financial crises. Past retrenchment campaigns were unpopular and controversial, but senior technocrats nonetheless maneuvered to stop uncontrolled local investment. As credit continues to rocket

Victor Shih by Fantake via Flickr

toward the stratosphere, China is in increasing need of such leadership again.