Balding on the Chinese Bailout: Be Concerned

The Chinese Bailout is Starting to Bail Fast
In the words of the Financial Times, the regulation:

“…told financial institutions to keep lending to local government projects even if borrowers are unable to make principal or interest payments on existing loans….(the regulation) explicitly banned financial institutions from cutting off or delaying funding to any local government projects started before the end of last year and said that any projects that are unable to repay existing loans should have their debt renegotiated and extended.”

Let me say that again just so it sinks in: banks were told to keep lending money even if the borrowers are unable to make principal or interest payments on existing loans and banks are forbidden from cutting, denying, or delaying loans. While country policy makers around the world have unofficially encouraged excessively loose credit policies and lenders may take such policies in individual cases, I have never heard of a similar countrywide or bank wide policy anywhere. (If anyone knows of a comparable case please let me know).
He goes on to make speculative inferences.
1. The local government debt problems surrounding the $3.5 trillion USD are much more widespread and profound than is currently recognized by people outside the Chinese government, the banks, PBOC and CBRC. For comparison sake, imagine Barack Obama and Janet Yellen announcing a similar policy for all local governments and banks in the United States. If the bad debt was limited to even a handful of provinces or loan types, we would not be seeing these types of policies.
That is consistent with what we know. Also, I would be surprised if I missed it, but were the results of the local debt audit ever announced? It was supposed to finish in October 2014. Assuming I didn't miss it, it's fair to speculate that the results were so bad they decided to keep it private.
2. The bankers must really be resisting the new policies. For the last month as news began to trickle out about this policy shift, we saw how the bankers didn’t want to buy the new bonds, didn’t like the pricing, the duration, and now the regulation tells them to keep lending even current borrowers are unable to service existing debt. This can only be interpreted as a public and strict ordering of bankers to walk the line set by government.

3. If debt problems were more limited and bankers were complying this policy would never have been made public in China.
Absolutely consistent with news stories posted here. Banks have not followed government policy easing, for example when mortgage rates were allowed to go lower last year, few if any banks changed their rates.
4. If the bankers are telling you what they think of the debt problems in China by resisting even the early forced restructuring, what is the government telling you by announcing ability to service debt is not a requirement for more lending and forcing banks to lend? Given the information asymmetries in Chinese financial markets, it helps to judge how those that should know behave. This policy appears extremely desperate by the government indicating their level of concern.

8. Expect to see a significant portion of the bad debt end up at the PBOC with no recourse back to the bank if the debt goes bad. The PBOC printed enormous amounts of money to keep the exchange rate low and the money supply rising in the past decade. Their new strategy seems to be to print money to lend out via low credit quality collateral.
Another round of devaluation on the PBOC.
12. While I would definitely be categorized as someone who has significant concern about the risks in the Chinese economy, and I respect many economists who are more sanguine about these risks, at this point I struggle to understand how anyone can see these signals from the Chinese government and not be very concerned about the buildup of financial risk.
The most sanguine economists are outside of China.

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