China’s Debt Suddenly is a Crisis

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In 2011, CymorFund warned of China’s off balance sheet debt in several articles including warning about State Owned Entities incurring large debt that were unreported.

Now today the Chinese government decides to admit the problem, makes an announcement that they will clean up their act, and Western News Agencies all run headlines exposing the problem including CNN worries about whether China will crash, Bloomberg highlights the problem, & BBC News reports on Chinese government financial audits.  

Why All the Attention

Because the Chinese government recognizes that local Chinese governments have borrowed and overspend enormous sums of money that are unreported, undocumented, and now could amount to a substantial portion of the Chinese GNP. Should these local governments be unable to meet their obligations on these debts, a major financial collapse could occur.  If you have been following CymorFund’s blog articles, you are already well apprised of this matter.

We partially reprint below today’s article from Bloomberg News because it illustrates the urgency that the Chinese government has suddenly placed on the matter.

What is important to understand, is that there are millions of new middle class income consumers in China and the clock cannot be turned back. These new consumers will continue to demand goods and services, regardless of any economic upset in China.

What is feared, is that the financial system in China will collapse as a result of all of this debt incurred to build empty highways, empty cities, empty office buildings, and roads to nowhere.

What will happen, is that there will be a slowdown in China and a day of reckoning for those that recklessly spent the people’s money. But life will go on. China accomplished a major miracle over the last ten years in turning the country from a dirt poor backward society, to a modern thriving manufacturing and consuming colossus second only to the USA. China surpassed Japan last year in GNP.

To accomplish this modernization, enormous sums of money were spent and the central government encouraged this spending. But by doing so, they transformed Chinese society and that cannot be changed. It would be very surprising if every official was honest and followed all the rules, but people are people everywhere, and you can be sure there was enormous overspending and enormous waste.  But the fact remains – China is now a modern economic Goliath and will continue contributing to the global economic expansion.

A Counterbalance to the USA

It has been an interesting period since 2008. The USA economic situation was devastated by the greed of Wall Street and ordinary Americans paid the price, But thankfully, a Communist government in one of the largest countires on earth, decided to break the rules and attemt to modernize the country, at the same time that America;s fabled Wall Street was busy destroying America. Imagine how much worse the economic situation would have been worldwide, would the Chinese phenomenon not have occurred, 

Lets be thankful, and take advantage of the start of the next great economic cycle. Invest Now.

 

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China Orders Government-Debt Audit as Growth Risks Rise

By Bloomberg News – Jul 29, 2013 2:54 AM ET
 
Beijing has classified the matter as urgent and audit officials have been directed to suspend work on other projects, to complete the nationwid

China will start a nationwide audit of government debt this week as the new Communist Party leadership investigates the threats to growth and the financial system from a record credit boom.

The State Council, under Premier Li Keqiang, ordered the review, the National Audit Office said in a statement yesterday. The office suspended other projects for this “urgent” work requested on July 26 and will send staff to provinces and cities this week, People’s Daily reported yesterday on its website, citing sources it didn’t identify.

Chinese stocks fell as the first full audit in more than two years underscored dangers to the economy from borrowing by local governments and an expansion of non-traditional sources ofcredit. The new leadership oversaw a showdown with state-owned lenders last month as the People’s Bank of China engineered a cash squeeze to pressure banks to better manage their liquidity and assets.

“Local-government debt has become a focus in recent years and is a source of concern about China’s growth,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong, who previously worked for the International Monetary Fund. “The new leadership is trying to give a clear answer.”

 

 

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By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.