Instead of using budgetary allocation to finance local infrastructure, the central government instructed local governments to form companies and borrow money from the banks, thus hiding the deficits....This insight, too, should sound familiar to us:
There has been so much waste, a lot of it financed by debt in the financial system instead of government debt. This means that either these wasteful projects will have to generate cash flow to pay back the banks or the banks will become insolvent. The Chinese government is grappling with this major issue.
That was the goal and continues to be the goal of policymakers in China: prop up the banks and make sure non-performing loans don’t appear on the books. We don’t actually know the amount of non-performing loans that exist on the ledgers of China’s banks. Whenever a loan becomes problematic, especially when the borrower is a major SOE [state-owned enterprise], it’s restructured – i.e. rolled over or extended.Does that remind anyone of a certain mortgage mess that is still making its way through our financial and legal systems?
Most of us don't have as good an understanding of China and its economy as we should. Shih's recommended books and commentary are great places to start remedying that shortfall.