Where China is hiding its debts – Victor Shih

Victor Shih Fantake via Flickr

Professor Victor Shih from the Northwestern University is the main investigator, looking for China’s sky high debts after its financial rescue operation. In Business Week Shih explains where China is hiding its debts, and why there might be more than even he can find, especially at the 8,000 local investment companies, who might have borrowed more than they can pay back.

Figuring out what projects the LICs have financed and how healthy they are is hard. Shih says LICs in the western city of Yinchuan, the capital of Ningxia autonomous region, have helped bankroll a building spree. New luxury villas and high-rise residential complexes, as well as a huge new soccer stadium, adorn the city. A science and technology center, a museum, and a library each occupy several football fields’ worth of turf, while an almost-finished skyscraper resembles New York’s Empire State Building. It’s pretty ambitious for a region that depends on cash transfers from Beijing for 70 percent of its total revenues. Shih estimates Ningxia’s debt at $15 billion—75 percent of the region’s economy. “A soccer stadium in the middle of nowhere is not going to generate much cash flow,” he says. “Without massive central government subsidies, I think many of these projects will not generate enough cash even to pay interest on their loans.”