It was almost exactly two years ago, when during China's long-forgotten attempt to actively deleverage its economy (remember that? good times…) we commented on the country's first attempt to estimate what its local government debt is since June 2011.
This is what we said in July 2013:
“China is preparing to admit that the level of problem Local Government Financing Vehicle debt is double what was first reported just two years ago, something many suspected but few dared to voice in the open. But not only that: since the likely level of Non-Performing Loans (i.e., bad debt) within the LGFV universe has long been suspected to be in 30% range, a doubling of the official figure will also mean a doubling of the bad debt notional up to a stunning and nosebleed-inducing $1 trillion, or roughly 15% of China's goal-seeked GDP! We wish the local banks the best of luck as they scramble to find the hundreds of billions in capital to fill what is about to emerge as the biggest non-Lehman solvency hole in financial history (without the benefit of a Federal Reserve bailout that is).”
Not surprisingly, after conducting the goal seeking “exercise” of estimating its local government debt, the final number was well below the worst case or even average scenario, while the level of NPLs was at a very leisurely pace around 1% of total.
We promptly accused China of doing what it does best: fabricate the data, but since the housing bubble was still raging (it has since burst), and the stock market bubble (which also popped a month ago) was yet to be unveiled, few cared. Furthermore, in early 2015 China unveiled an LTRO-type plan in which in would swap out maturing local government debt with long maturities, thus hoping to firmly shove the problem with unsustainable local government debt under the rug for the (un)forseeable future.
Then overnight something unexpected happened: Sheng Songcheng, the director of the statistics division of the People's Bank of China (PBOC), was quoted by the National business Daily on Saturday whereby he essentially admitted China had been lying about not only its local debt exposure but the level of NPLs across the economy.
