One thing that seems to have come out of the 4th plenum is a serious determination to force local authorities to clean up and recapitalize local and provincial banks. There are basically three ways they can do this. One way is to force mergers among the banks, but because all...
...or nearly all the banks are effectively insolvent, this doesn't really address the problem and will have no immediate impact on the fragile liability side of the banks until they are big enough to attract a lot more retail deposits.
A second way is for local governments...
A second way is for local governments...
...to borrow and use the proceeds to capitalize the banks. This might fix the banks, but does so by transferring their net liabilities directly to provincial balance sheets. It doesn’t resolve the debt problem.
A third way is for local governments to transfer assets directly...
A third way is for local governments to transfer assets directly...
...or indirectly (sell them and transfer the proceeds) into the banks. Local governments will strongly oppose this dilution of their control, but Beijing, on the other hand, may see it as an added benefit. This last is the only real way to resolve the overall...
...debt problem. Whatever they do, however, its pace is constrained by the growth arithmetic: anything that slows debt growth must also slow GDP growth, and I don't know if Beijing's tolerance for a rapid slowdown in growth is commensurate with their desire to clean up the banks
