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China land values, leverage echo US boom — and perhaps bust

Workers struggle by lights at night with hoes, cut the signs for the Olympic rings in front of an unfinished 30,000-seat stadium, bulbous gymnasium and swimming pool complex in a little known Chinese city.

Loudi, home to 4 million people in Hunan province, is to pay for the project with 1.2 billion yuan (185 million) in bonds, secured by land valued at $ 1.5 million the acre. That's about the same as prices in Winnetka, a suburb of Chicago which is one of the richest cities in the United States, where the average household earns more than $ 250,000 a year.

In Loudi, people take home $ 2,323 a year and there are no Olympic Games here on any calendar.

"The debt is not a problem as Loudi is not a place developed," Yang Haibo, an official in the financing vehicle of the city, said as he sat with colleagues in a meeting room filled with smoke under a No Smoking sign. "It is a city emerging."

Opinion on dozens of bond prospectus Chinese language, show how widespread these loans has become.

In China, as the United Statesbefore the collapse of the subprime mortgage market in 2007, local debt is backed by a warranty that is overvalued, it may be difficult to sell and, in some cases, no.

Officials in Shaoyang, whose colonnades government building is called the White House, the value of 18 parcels of land to nearly four times what a similar plot sold for in May.

In the town northeast of Cangzhou, the man in charge of asset finance an extension of the port can not locate the land of his company as collateral for a bond sale 1 billion yuan.

Local spending spree

And a spending spree in Yichun, a neighborhood on the Russian border covered by ice much of the year, is backed by promises of future land sales managers recognize not materialize.

More than 400 billion yuan of municipal bonds sold since 2008 - a part of as much as 14.2 trillion yuan loans in local communities - showing how local officials rely on their own forecasts that land prices will continue to increase. Efforts by the central government to cool the property market have so far had no impact on their estimates.

The value of residential land has fallen 30 percent this year as local officials increased sales to repay the loans, according to Credit Suisse Group.

"It's a great myth that the land sales will be able to support even the interest payments, much less principal payments," said Stephen Green, the Hong Kong head of Greater China Research at Standard Chartered. His research team assumed that at least 4000 to 6000 billion yuan in loans from local government - perhaps more - will not be reimbursed by the project, Green wrote in June 1 29 Report on the debt to China.