East: As the Western world has muddled through the last few years of recession/depression/stagflation, China has been admired for their vitality. Spectacular growth, and huge investments in infrastructure. Except that, well, maybe it isn't.
Back in 2009, the Chinese government loosened lending restrictions on banks, with the intention of re-igniting the economy. It worked! Kind of. Local governments took on massive debt, because they could, and embarked on infrastructure building like crazy. This helped heat up China's GDP. Of course, other unsavory characters, of whom there are many in the local Chinese governments, also used money to speculate in the stock markets and other business ventures. Local governments planned on paying the money back mostly by selling off land. It looked like a sure thing, because China has been in a land-craze for a couple of years now. However, as more real estate has come on the market to pay back the debts, the price of it is going down. So local governments are on the hook to banks for billions and billions, and their major source of cash for repayment is drying up. The banks only recourse will be to go to the Chinese government, which has promised to back up these loans.
NONE of these loans are booked as part of China's debt! And an offical audit, just completed, may have understated the outstanding local debt by 3.5 trillion yuan. That would be a 30% increase over the audit's total of 10.5 trillion yuan. Even the lower number is 27% of China's GDP. (The comparable number in the U.S. is about 20%.)
What does this mean for us? Well, we all know that China has been the biggest purchaser of United States bonds. However, if they have troubles at home and need to cover these delinquent local debts, there won't be nearly as much for them to buy our bonds with! Financing our bloated, out-of-control government will become more of an issue, driving interest rates up. Tax rates may go up as well, as our elected officials scramble for additional revenue. (Unfortunately the scale of our debt dwarfs our ability to repay.) Finally, the Fed may try a third Quantitative Easing, which entails printing money, then using that money to buy our own bonds, thereby swamping our economy with even more dollars and adding to the inflation.
On the other hand, this guy (who knows a heck of a lot more than I do, maybe), thinks that maybe this won't be such a bad deal for America:
Why does China's debt matter to its central government in Beijing, and why does it matter to Americans and others outside China's borders?Don't worry...there's news at home, too.
Americans probably wouldn't be hurt that much. Some people worry that if there's a debt bubble that somehow bursts, then China will redeem its large holding of U.S. Treasuries to bail out Chinese banks. That is a possibility. I think that if that were the case, others would snap up those Treasuries. Interest rates may go up a little bit, but probably not by that much.