2012-09-28

Dongguan is Greece update: Dongguan bankruptcy goes international

At the end of August I wrote a post called Cash crunch for local governments in China: Dongguan is Greece, with stories of unpaid contractors and one individual going so far as to call Dongguan "Greece."

Now the story has made it into English language press.

Boom city Dongguan faces bankruptcy as village debts soar
Experts have found Dongguan's village debt woes stem from two factors: a tightly-bound landlord economy, plunged into crisis by failing factories in the global downturn, and political pressure on local village chiefs to pay generous "dividends" to voters under the immature rural election system.

"The financial problems of the villages are much more serious than expected," said Shao Gongjun, the owner of a printing company who blogs on Dongguan's economy. Shao attributed much of the crisis to the local authorities' dependence on rental incomes.
I haven't seen articles about gold dividends in Dongguan, but maybe some of those generous dividends in other cities are being paid with debt......
The fall in rental values forced 60 per cent of the 584 villages in Dongguan into budget deficits, the study by Professor Lin Jiang of the finance and taxation department of Lingnan College at Sun Yat-Sen University found.

......"In some rare cases, the leader-elect promised to give each household 10,000 yuan per month," Lin said. The money would come from the village community "investment" - effectively, the rent they collected from factories.

Lately, village chiefs have found it difficult to fulfil such election pledges. But instead of reneging on their promises and sparking the anger of villagers, they turn to the rural credit co-operatives - the de facto local banks - for short-term loans at interest rates as high as 30 percentage points.

......The Dongguan government is in poor shape to handle a crisis. Its GDP growth slowed to 2.5 per cent in the first half of the year. The average growth in the past eight years was about 11 per cent.
Blame democracy! The debt is smaller, but the concept is the same: keeping unrealistic promises made to voters.

ZeroHedge has coverage as well in A Chinese Mega City Is On The Verge Of Bankruptcy.

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