January 5th, 2012
09:37 AM GMT
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Hong Kong (CNN) - Fears that China could soon be facing its own Lehman-style banking meltdown are being fueled by a National Audit Office report which found 531 billion yuan (US$84 billion) worth of irregularities in local government debt.

According to the Chinese government website (www.gov.cn), the audit found 10.7 trillion yuan of local government debt at the end of 2010, a result of easy loans made possible by the government’s 2008-2009 stimulus injection.

Most of the money, say analysts, has found its way into the construction industry, creating entire cities, complete with apartments and offices that remain empty and unsold.

Many companies also have unpaid inventories, according to the government audit, and have little or no oversight of accounts.

“The audit discovered that 1033 such companies have problems such as false-financing, the registered capital being unpaid-in, illegal provision of funds and the withdrawing of them by local governments and departments, involving a sum of 244.15 billion yuan,” the audit said in its findings.

“As the investment of debt funds is mainly directed by these companies at projects serving public welfare or quasi-public welfare whose recovery of funds takes a fairly long time, their profit-yielding capabilities are rather weak.

“A total of 1734, or 26.37%, are loss-making companies.”

Stimulus money has also made it easy for provinces to get involved in massive infrastructure projects, such as high-speed railways, remote airports and even port projects that remain largely unused, analysts say.

Larry Lang, professor of finance at the Chinese University of Hong Kong, was reported by The Epoch Times as saying that China’s economy is on the “brink of bankruptcy” and that “every province is a Greece.”

The remarks were made in a lecture by Lang in Shenyang City in northern China’s Liaoning Province and reported after they were posted on YouTube.

In a controversial series of claims, Lang said that overall debt in China was as much as 36 trillion yuan (US$5.68 trillion), official inflation figures of 6.2% were as high as 16%, domestic consumption represented only 30% of economic activity and that there was “serious excess capacity.” He added that despite government headline figures of 9% growth in GDP, production had actually shrunk in China.

He also said China had one of the highest overall tax rates in the world and that Chinese businesses were paying as much 70% of their earnings in direct and indirect taxes.

“Once the economic tsunami starts, the regime will lose credibility, and China will become the poorest country in the world,” Lang concluded in the lecture.

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soundoff (50 Responses)
  1. Jason

    I believe every economist in the western world is trying to compare China to the west. China is a closed economy. The government has the luxury of not being saddled by democracy. If the storm hits, the central government can simply print their way out of the problem. This would solve multiple problems. First, it would correct the debt burden. Second, there would be an increase in the money supply, thus lowering the value of their own currency. This would benefit their exports and reverse the appreciation of the yuan. Of course, this would eventually add to the inflation problems, but again it is a closed system that would be able to react just as quickly to that problem. China is not going to be poor anytime soon. The thing that would be more worrisome would be the contraction with associated moves. China had to grow to support such a large population. If they cannot support that population then domestic upheaval is the result. If China has to worry about domestic issues will they be able to support and keep North Korea in line?

    January 5, 2012 at 10:12 am |
  2. Sourav (London)

    I am not sure what to glean from this. I find it difficult to believe that China, being such a cautious player can be sloppy in it's affairs. We constantly get to see reports that in no way reflect reality.

    January 5, 2012 at 10:20 am |
  3. BBC

    CNN always picks specific news to report about China. Bizarre!

    January 5, 2012 at 10:31 am |
  4. Lord of Shenyang

    I can't believe CNN print news like this. I was right there at Lang's lecture. And that is not at all what his lecture was about. How can you take a fraction of his words, out of context, and convert it right into your anti china propaganda .

    January 5, 2012 at 10:31 am |
  5. Chris

    This article is simply rubbish. Every week I read new statements by economists that describe an impending provincial debt explosion. Most economists unfortunately have very short foresight, and all crave to be the individual cited as the predictor of the next meteoric economic event.

    The Chinese economy is incredibly healthy. Millions of educated graduates leave university every year, billions of FDI continues to enter the country, Chinese consumers saved many of the Fortune 500 companies from disaster during 08-10. Shanghai lacks the refinement of New York, Tokyo, Paris et al, but the city will be one of the most important of the 21st Century.

    Go further west and you'll come to cities such as Chongqing. Cartier, Louis Vuitton, Tiffany's, handmade Italian ice cream. Some parts reminded me of Hong Kong, others New York or San Francisco.

    On the train from Chengdu to Chongqing, one still see's peasants in the countrywide with thatched roofs. If one looks slightly higher they'll notice what seems like the development of an endless highway. Where there is poverty in China, development efforts are not far away.

    While billions of debt may be at risk of default, I'm quite confident that Chinese development will not be at risk. Wealth generation and economic activity is visible at every level in China, which is more than can be said of the US or Europe.

    One thing China IS bad at... service. Go into any retail store and you can be sure the staff will reply with glaring one word responses.

    January 5, 2012 at 11:09 am |
  6. douglasjames

    For all those that scoff the U.S.A. and rebuff our system and praise the system of China, the ole saying holds much weight:
    "He who laughs first, laughs last." Good luck China.

    January 5, 2012 at 11:20 am |
  7. Schloegl

    This article is not only simply rubbish. This article is active political and commercial desinformation!

    January 5, 2012 at 11:44 am |
  8. Zaus

    I think the USA need to do his homework first....China is a big nation raising more than 9% year...and the USA????

    January 5, 2012 at 11:48 am |
  9. Henk

    True. CNN is strongly Anti-Chinese/Anti-European. I would label it a Propaganda channel if it operated during 1940's Germany. They constantly pick negative articles about China and Europe while constantly stating positive news about the US. We don`t read much or anything about the US sitting on the largest DEBT PILE in the history of our world now at over 15 Trillion dollars (over100% of GDP). The 50Million Americans on Food stamps and the over 50Million Americans without Any Health insurance (Where are the interviews). The 43 US states in massive DEBT of their own. The insane Local debts of US municipalities. The Massive Backlog in infrastructure maintenance of bridges, dams, tunnels, electric grids etc. The falling education system etc.

    CNN also claims to be a supposed international news channel. Yet about 80% of their news is about the US. International my A..

    January 5, 2012 at 12:12 pm |
  10. John

    I travell often to China in business from Europe and one thing i must say!
    China is loosing its appeal as a cheap production place, year by year prices are increasing due to the internal market and average workes who wants to receive more from the work they do, wasn´t this the problem in Europe and the US in the 80`s?
    China has developed fast for the past years, but money will not come easely as before, remember that many Western companies have invested heavily in China and now some are trying to get out too.
    I also see many empty places in China, airports, even roads to nowhere, these were exactly the problems Europe created to ourselves, if a devaluation of the aYuan will help exports, this will also create an inflation problem which China does not want to happen, otherwise the rebellion will start as people cannot afford to pay their bills!
    Welcome to 2012!

    January 5, 2012 at 12:26 pm |
  11. mike

    I have lived in China for a couple of years and one thing is very obvious that there has been a lot of money wasted on non productive assets. The real estate market has recently hit a brick wall and money is tight. The signs are not good if you look behind the "good face'. I just hope that the average person in China does not have to suffer. The rich can look after themselves as most have with insurance policy – foreign residency.

    January 5, 2012 at 12:34 pm |
  12. Marco Hsiao

    (1) "a National Audit Office report which found 531 billion yuan (US$84 billion) worth of irregularities in local government debt." US$84 billion is a small proportion in current economy of Mainland China.

    (2) "creating entire cities, complete with apartments and offices that remain empty and unsold." This is a normal situation of business. Waiting for 5 years, these apartments and offices might double their value. Mainland China's development is so fast, real estate is a good investment, believe me!

    (3) “A total of 1734, or 26.37%, are loss-making companies.” If it is true, this is a good business, because 73.63% companies are making profit, it is normal.

    (4) This is a special point of view by Professor Lang, Larry 郎咸平. His talking has been known in Chinese world for 2 months. But at least there are other 50 professors of economics at universities in Hong Kong or ROC Taiwan don't agree it. (It is too exaggerated, many scholars think so.)

    (5) Local provincial government of Mainland China owns big lands. In near future these lands would be sold, the value would be more than US$ 20 trillion. After these lands were bought by civilian, the economic development would be more robust.

    January 5, 2012 at 12:59 pm |
  13. Jack Moulder

    China sucks

    January 5, 2012 at 1:24 pm |
  14. Marco Hsiao

    In 2011, the total trade (export and import) of Mainland China is about US$ 3.6 trillion.

    In 2019, the total trade of Mainland China will surpass the US and the EU; then the gap will expand continually. 700 years ago, Italy's Marco Polo has said that East Asia is more progress than Europe.

    Don't be jealous! It also provides great commercial opportunity.

    January 5, 2012 at 1:33 pm |
  15. zhongming

    Jason: For the Chinese government, the reality of "not being saddled by democracy" is increasingly more like a cursing rather than a blessing.

    What is the #1 reason for today's bad loan crisis? Extreme Over Investment. When it happened? Over the past few years especially in 2009-2010. Why it happened? Because the government needs political stability. They cannot afford Chinese economy to falter like just about most other countries in the world, because a nonstop rapid economic growth, regardless how detrimental it might be in the long term, is the only legitimacy that the CCP can hold on to its power. Now do you see what the crux of the problem really is?

    Can you really believe the stats of the Chinese central and the local governments? No, you cannot. Because, again, due to lack of any democratic process, there are no transparency and accountability. The government can do and say whatever it deems to be necessary for the sake of "stability". What that means is that no one really know the true nature and the depth of the crisis.

    January 5, 2012 at 2:02 pm |
  16. Justin

    I'll sum it up. Capitalism didn't work... guess we'll have to go back to communism... Sigh.

    January 5, 2012 at 2:04 pm |
  17. zhongming

    As we speak here on this forum, strikes of factory workers demanding higher wages are spreading like wildfire nationwide, they have been blatantly exploited for way too long. Thanks to the internet, the government cannot quell the strikes as easily as it used to be.

    January 5, 2012 at 2:11 pm |
  18. zhongming

    Justin: China's system is no communism. It is an autocratic political system with the most cruel and hypocritical form of capitalism.

    January 5, 2012 at 2:22 pm |
  19. 4AllJustice

    The corruuption has reach such an extenxt that it is now behond the control of those crimininal comunist leaders of china , it is every corrupt official for himself trying to get a piece of the money from top to down, China will enter a deep recession but the CCP medium level to top level will not be impoverished, they will make the people bear ever more hardships before they will give up power, they will never give up power, people can win only if a critical mass of citizens in China denounces the CCP , ceases to be afraid and stops collaborating with the criminals. I hope China can be free from the CCP gangsters and that soon can put these criminals on trial.

    January 5, 2012 at 3:13 pm |
  20. Creon

    I'm Asian living in Asia and not a China fan. But I think I have to comment with a simplistic approach: with the cash flow of China right now (hello forex reserves), they can weather this "doomsday" prediction. The most feasible way, and I'm using this term loosely, for China to not be sustainable is inflation (eating up ordinary people's savings and consequently massive unrest), this is where it will hit them hard.

    As long as it's politically stable, China will just sit comfortably and flex it muscles stronger (to the disdain of its neighbours).

    January 5, 2012 at 3:22 pm |
  21. malapropy

    l dont agree with this story at all, even if l were its a very contradictory story. If the provisional governments are indebted to the Central Government , so what? In a way l think its a very prudent move for the Central government of China to value each contribution it makes to the provinces and also force the provinces to produce enough money to be able to offset the developments made to their provinces by the Central Government.In that way the policy is productive, remember the money invested is Chineese money (National Purse) He who borrows from it shall always have a responsibility to pay it back its a national assert. In a way China so called "crisis' is easily seen , where the money went was accounted for by building roads flats etc. Isnt thats what the Government is for to do what no one individual has to for the Good of China people, viva China.Its not about the west or the communist is about pure civic obligation manage the national purse very well and creating an enabling infrastructure for all, what wrong with that

    January 5, 2012 at 3:30 pm |
  22. Kyle H. Davis

    To be honest, I am surprised it has not happened yet. It truly is on the verge of a meltdown here. Regardless of how much those armchair pundits (who have never stepped foot in China) feel, once you spend any real time in this country, you have no idea what is truly going on.

    The biggest mistake you can make is to base your perceptions on western understanding. People DO NOT THINK THE SAME HERE. The whole idea of "They are just like us" is just garbage. (No, I'm not making a statement about people being better or worse).

    Everything is done with five year plans here, there is no natural progression of anything. This sounds like it could be a solid foundation, but when you consider all of the variables that have to be taken into consideration, the mess can be clearly seen.

    I've always said it is like the Party is balancing a serving tray on one finger, with a handful of marbles on top of it. They are doing their best to keep it balanced, and it seems to be ok, but the resulting disaster is inevitable.

    It all started with Deng's manipulation of the Yuan, which created the massive dependency on foreign money for China's development. There has been no development of infrastructure, only personal wealth development and rapid social development.

    Walk into the middle of a lower class neighborhood in an inner city, or a poor mining community in the US, and toss 10 million dollars in the middle of the street and see what happens. That is what is going on in China.

    $500,000 cars trying to avoid donkey carts on the same roads.
    People dedicating beside luxury apartment buildings.
    Doctors who smoke and spit on hospital floors.

    It's the Beverly Hillbillies here, and there is nothing going on in any way to build up China's infrastructure or internal economy.

    Second largest economy.
    Fastest growing economy.
    Largest trade surplus.
    One of the largest holders of forex reserves.
    Second largest importer of luxury goods.
    Largest automotive market.
    Foreign trade growing faster than its GDP.

    And its Per Capita GDP is still lower than that of Cuba.

    January 5, 2012 at 4:54 pm |
  23. Preppy

    “Once the economic tsunami starts, the regime will lose credibility, and China will become the poorest country in the world,” Lang concluded in the lecture.

    Sour grapes.

    January 5, 2012 at 5:15 pm |
  24. taipeir

    Saying it will be 'the poorest country in the world' seems outrageous, I wonder did he really actually state that or not?

    To the last poster, China has excellent infrastructure (or will have when all subways are completed, and most of the high speed routes) and is actually overbuilt already, too many bridges/roads/ports etc., the problem is the behaviour and education level of people needs to catch up along with rule of law and rampant corruption and lack of social benefits.

    You are dealing with numbers and unstable situations here, no country of whatever political persuasion from socialist to capitalist can ignore conflicting and troublesome numbers. You cannot always control things and the more you try to control sometimes (by over stimulus for example) the worse things can actually get!

    Although it still going to grow and prosper in future significant problems will pop up this year, there are too many issues going on that will effect it, property bubble, local government debt, oil shock and inflation, export industry struggling with lack of demand.

    January 5, 2012 at 5:27 pm |
  25. LOL

    It's funny that CNN actually quotes The Epoch Times. The Epoch Times is founded by Falun Gong and as credible as the onion.

    January 5, 2012 at 6:53 pm |
  26. mh

    I have to say, China is infamous for ripping off the ideas of others, remaking various things in the cheapest possible format they can achieve. And I have seen again and again that the quality of most Chinese-developed goods is woeful – at least those imported and sold at various discount retailers. The Chinese seem to fancy themselves masters of illusion, so why would their attempt at replicating a capitalist economy be any different? They think they can 'borrow' such a complicated ideal and implement it on the cheap? I think they bit off more than they can chew on this one.

    January 5, 2012 at 8:50 pm |
  27. China

    The Epoch Times?
    you mean that press of Falun Gong?
    hahaha, now the world knows why USA is falling, because US people read this press.

    January 5, 2012 at 9:07 pm |
  28. China

    The Epoch Times?
    They claim more than 100 mio. memebers of CCP has quited the party!
    USA, USA!
    Why you are so funny now!
    where was the USA of Reagan!

    January 5, 2012 at 9:10 pm |
  29. China

    USA media like CNN claims that China will collapse in next week.
    They report like this 60 years.
    and they are right once? can you quote us one single example, that their China-Collapse-Theory comes true. hahahahahaha

    January 5, 2012 at 9:12 pm |
  30. China

    But wait!
    many chinese despise the Epoche Times and say they are only worth as toilett paper.
    many chinese say, they have almost not seen the news in Epoche Times are real.
    and the chinese also despise the CNN.
    CNN makes friend with the Epoche Times.
    CNN+The Epoche Times.
    They rocks!

    January 5, 2012 at 9:16 pm |
  31. China

    But really again!
    USA has become so shabby to quote the Epoche Times.
    nobody has ever thought of this.

    January 5, 2012 at 9:18 pm |
  32. That'snotTrue={

    .......Dear USA/CNN
    Before going of on China's debts...from sources with few or little credit.
    Thanks??? Honestly stop it with the demonizing of China...people aren't buying it here or on Time magazine....sooner or later you're going to turn your readers against you...I look forward to that day ^.^

    January 6, 2012 at 2:35 am |
  33. Douglas

    China is very difficult to enter into a crisis!


    January 6, 2012 at 2:50 am |
  34. Douglas

    China is a superpower!


    January 6, 2012 at 2:51 am |
  35. Mark China

    zhongming is right. I live in China and I can see the government suck. And I think the situation is not good here like before. If the professor is right, many rich people will leave the country because of the officials will bribe them to keep their status and the poor will suffer more than before. God will break China in the middle. God bless the poor people here.

    January 6, 2012 at 4:06 am |
  36. Mark China

    Remember when they mentioned about the construction bubble? Many people didn't believe that but now it is happening. And the problem is that Chinese people are selfish( one part of it the government created to be selfish, and the other the people themselves), they will flee and not tell anybody about the big problem in the country. Now the new about – to – be president of China wants to control the universities, the student's thoughts.

    January 6, 2012 at 4:15 am |
  37. JamesX

    not sure why some would claim China need to grow to support the large population. The only reason we, the US, need to grow is because our population is growing – E.g. we need to create new jobs for the new population or they go unemployed and social unrest, productivity, consumption all goes bad.

    China's overall population isn't growing nearly as fast – due to their birth control policies. The have far less need to "grow" their economy than we do.

    January 6, 2012 at 6:50 am |
  38. Sathanphi

    China is going downhill very fast in very near future for sure , who want to make a bet !

    January 6, 2012 at 7:33 am |
  39. Sathanphi

    I think the China need to look into they own first....China is a big liar abuse human nation will going down to hell ???? what a shame on Han !!

    January 6, 2012 at 7:37 am |
  40. zuijiadeai

    Most of English speaking news about China from US perspective are rubbish and anti-china. I have been heard about China debt crisis from weeks to weeks since year 2003 and nothing happened so far. It seems that US and Europe is going downhill faster than China. Well economics is always up and down, nothing to worry about. This news is exaggerated

    January 6, 2012 at 2:16 pm |
  41. Peter

    recent report had shown that Chinese urbanization has reached 51% with an estimated 120 million people more on their way to be urbanized around 2014. Those empty buildings will be filled as low budget homes are being built while highly bubbled real estate gets a soft landing to more realistic values. Domestic consumption had risen 17% compare to last year so it can't be only in the 30's as per this report. 30% domestic consumption was last reported at least 5 years ago.
    Local government debt had been cleaned by half was reported by the same National Audit, which was the other part of the story. Strange that, only the negative part about the inappropriate funds is reported but the positive part is "censored". Very manipulative editors

    January 8, 2012 at 4:13 am |
  42. joe

    I live in a country where the government and social elite are dominated by Chinese and can tell you for a fact that the Chinese culture is highly influence by greed, self-serving actions, and supported by lies. This article exemplifies what my experience has been even in a different country where the Chinese rule. I believe this is the first mainstream article that truly reflects the nature of what is going on in China. I have numerous friends who operate businesses in China and they all say they can't make a single investment without paying 30%+ corruption fees to the local government officials.

    January 8, 2012 at 4:28 am |
  43. joe

    It is exactly what I've been telling all the people around me here for over 2 years now. I'm not a genius, just know from the brokerage business to not trust the mainstream headlines as fact. China also has a lot of unseen debt that is piling up very fast for China that is not being accounted for. It is the environmental and social costs that all other developed countries have that China doesn't. You can't ignore the environment too long or you end up with the same situation Western Europe did in the 90's when they inherited Eastern Europe – deadly, costly, environmental disasters that are still today being felt by those people who live in E. Europe, and was a major drag for over a decade while they paid the cost of cleaning up the best they could. China's environmental mess is even worse and the Chinese people will rebel, in fact, they are already protesting and being physically disbanded by police and military in a southern provide over a new power plant being built, and it is entirely over the issue of health. This is a trend not a one-off occurrence.

    Also, in the mainstream media they always mentioned China's high personal savings rate compared to America's as being a good thing. For sure American's need to save more, but what the news doesn't say is that the reason the savings rate is so high is that they have virtually ZERO social welfare in China so you have to save or you fall through the cracks. Keep in mind that only about 300 – 500 million people live any kind of modern life where they have the normal necessities or any modern luxuries, and, all of these people live in these mega cities of 10 million people, or more. Beijing is over 50 million people. This leaves 800 million – 1 billion poor people who will realize that Maos dream of equality has gone terribly a miss and will lead to mass demonstrations, even riots, over social injustice.

    January 8, 2012 at 4:36 am |
  44. Bill Simpson

    It sounds like professor Lang wanted to get his name in the news, which he did. The Chinese government has enough money to bail out all banks and local governments that might get into trouble. And the Chinese people stuff money into banks as fast as the banks can waste it.

    January 9, 2012 at 11:49 pm |
  45. ikander

    @Mark China
    The Chinese government has already started to cool off the construction market in anticipation of any burst in the future. They are far from stupid and if an average CNN reader can think about the issue, you can bet that they probably know way before we did.

    That's not truth, Epoch time also happen to be excellent paper wraps for bottles and table covers when you don't want to spill stuff on it.

    January 17, 2012 at 7:11 pm |
  46. eman

    View moments fishing owl in the pitch


    January 27, 2012 at 2:47 am |
  47. k

    The west depends on china for their iphones and china depends on the west(markets) for their jobs. So chinas economy can still crash if the west crashes.

    January 29, 2012 at 5:30 pm |
  48. will

    Watch for this guy to be "disappeared" in the next couple weeks.

    January 29, 2012 at 10:53 pm |
  49. John

    You people are fools for believing that CNN is writing a rubbish article. First of all, they are citing this man. I watched the video where he talks about it. I don't think you guys realize this but CNN has articles on the front page sometimes that have people talking about the west attempts to make nonsensical claims about china. You can't take way the words that he said. Second of all, China is facing big real estate and infrastructure problems. Many of the infrastructure they invest in goes unused. This is a sad truth. Their provinces are borrowing money from China left and right, and are not being paid back, because they can't afford to. China doesn't know what to do with their money. They can put it in U.S. treasury (which they do a lot) or they can invest in infrastructure. However, they are moving faster than the middle class is. You can't deny that fact. Although I don't know the accuracy of these claims, I do know they are having huge problems with real estate. Some leasers are even providing incentives like BMW's for people to rent their apartments.

    January 30, 2012 at 6:23 am |
  50. Robbin Goal

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    January 31, 2013 at 10:14 am |

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