Saturday, March 13, 2010

Chinese banks are insolvent?

...Readers here are scratching their heads as if to say "Why tell us this now?".

Its not just the stimulus program to blame, but a multi-decade misallocation of capital based on government whim.

Full article.

March 13 (Bloomberg) -- China may be forced to bail out banks that made loans for local-government projects under the unprecedented stimulus program unleashed in 2008, according to Citigroup Inc. and Northwestern University’s Victor Shih.

In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.

“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said Shih, a professor who spent months researching borrowing by about 8,000 local government entities.

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