The $9 trillion of Chinese local government bonds that helped drag the rest of the world out of the 2008 financial crisis are a growing risk this time around.

China’s Murky Debt Corner Faces Funding Squeeze

(Bloomberg) — The $9 trillion of Chinese local government bonds that helped drag the rest of the world out of the 2008 financial crisis are a growing risk this time around.

The bonds funded an economic boom in China more than a decade ago, as local authorities borrowed heavily to invest in everything from roads to subways. But one of China’s biggest state-run investors advised asset managers overseeing its money to sell some of the debt, Bloomberg News recently reported, intensifying pressure on the securities.

It’s left authorities with the tricky balancing act of defusing a huge risk to the country’s lenders without triggering defaults and destabilizing the financial system. Any implosion of bonds from local government financing vehicles would ripple through the local banking system, further pressuring overall growth in the second largest economy in the world.

Goldman Sachs estimates that 34 trillion yuan ($4.75 trillion) of local government debt sits on the balance sheets of banks it covers. The potential headwinds to growth would hit an economy whose recovery after the pandemic has already been relatively tepid.

Economic uncertainty in China is still extremely elevated

Especially compared to that seen in the US pic.twitter.com/3Jv6QQd4Eg

— Game of Trades (@GameofTrades_) July 16, 2023

h/t mark000