How to Deal With Debt: Extend and Pretend

FT: Collusion keeps debt problems at bay in China’s private sector heartland

The local government leans on local banks to keep the credit flowing in, companies are taking on ever-larger amounts of debt to service a growing loan burden, while the bankers reckon the real level of bad loans is as high as 30 per cent of total lending.

Welcome to the manufacturing sector in Zhejiang, 2016.

Zhejiang has been doing this since at least 2014...Rumored Mass Death of Companies in Xiaoshan District of Hangzhou If Banks Collect on Debts; Government Tells Banks to Sit Tight or Leave

Or as I pointed out earlier this week: China's Default Bombs Haven't Been Defused

Back to Zhejiang:

A study of the private sector in Zhejiang conducted by FT Confidential Research, a unit of the Financial Times, found companies struggling with an ever-greater debt burden as the economy has slowed and orders have dried up.

The situation would be considerably worse — possibly even at crisis levels — were it not for the collusion of local government officials and local banks, none of whom are incentivised to recognise the problem.

A majority of the firms FTCR spoke with admitted they were avoiding default by taking on new loans to repay old ones. Among the study’s findings was that 81.3 per cent of respondents said they had borrowed from mainstream or underground lenders to repay existing debt. Equipment sales, loan extensions and, more recently, debt-for-equity swaps have also been used to avoid default, but debt chains are straining.

As the credit dominoes fall in China, the government waves its hands and people look away, while the local government quietly resets the dominoes and adds more dominoes to the pyramid...