02.19.2013 18:42

Waiting for a Crisis

The government has two choices: cut spending and fixed-asset investment or wake up to a messy economic reckoning
By Andy Xie
 
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Bank loans and money supply rose sharply in January. The timing of the Spring Festival may have distorted the data. Still, there are signs that many local governments with new leaders want to try an old trick, pushing fixed-asset investment (FAI) to create GDP and fiscal revenue. This would turn bank loans into GDP and fiscal revenue.

Local governments are already heavily in debt. Pushing FAI would keep them liquid through new loans. It is essentially a pyramid scheme and can go on as long as the banks are willing and able to lend. But constraints have appeared.

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