By John Richardson
NEW infrastructure projects in China (see above chart from Rio Tinto) might deliver a boost to chemicals and polymer demand growth in Q4 this year and into 2013.
But doubts are being expressed about whether some of these projects can be funded, given the build-up of bad debts in China's financial system since the late 2008 economic stimulus package.
"Banks' exposure to local government borrowers is greater than we anticipated," said Yvonne Zhang, a Moody' analyst in a statement last month, as the ratings agency raised its estimate of local government debt by Yuan3.5 trillion ($540bn).
China's National Audit Office says that local governments had amassed about Yuan1.7 trillion in debts by the end of 2010, about 25 percent of China's GDP. But Victor Shih, professor at Chicago's Northwestern University, puts the figure at 40-45 percent of GDP, in this interview with Credit Suisse.
Shih uses the example of the city of Tianjin, which has borrowed $64bn for the Binhai New Area, as the most extreme example of a local authority in deep water.
Investments include a $22bn Sino-Singaporean joint venture Eco City, an exhibition hall, an artificial beach, a stadium and, of course, a shopping mall, according to Foreign Policy magazine. Tianjin's debts are in excess of 47 percent of the city's GDP.
Shih believes that the bad-debt problem is more of a long than a short-term issue.
And Chovanec warns that lenders will soon need to use remaining liquidity to refinance wealth management and property trust products. In other words, they will be scrambling to find enough money to cover existing liabilities.
Chang draws a connection between Chovanec's views and the 41.3 percent fall in July bank lending.
Local authorities, as they struggle for new lending, are also facing a fall in revenues due to the economic slowdown, continues Chang.
This has resulted in new taxes being levied in an effort to balance the books.
"Taizhou, in prosperous Jiangsu province, has imposed an illegal 5 percent tax on rentals and has sent collectors door-to-door to demand the levy," he writes.
"Fifteen cities and counties in Hainan, the island province, have collected only 17 percent of the budgeted land sale revenue.
"Hangzhou's tax revenues are down 2.7 percent this year. This figure does not include revenue from land sales, down more than 50 percent in the first six months.
"Xiangtan in Hunan has missed salary payments to teachers and not made pension contributions.
"It is rumoured that Wuxi could not pay salaries in May and that Ordos, the infamous ghost city, had to borrow from a state coal company to meet operating expenses."
Perhaps local governments, which are bearing the brunt of new stimulus efforts because of Beijing's political impasse, will somehow scramble enough money together to fund most of the infrastructure projects.
But that doesn't solve the problem of whether in the long term, China actually needs all these sports stadiums (some of which are being blown up!), artificial beaches and shopping centres.
China's bad debt crisis is at the very least, as Shih says, a longer-term threat to the economy.