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Every single day, we get a new story of another stealth bailout by China (since a bazooka stimulus remains out of the picture, seeing how China pretty much used them all up by the time COVID rolled out and pushed the country's consolidated debt to GDP to around 400%). Here's another: according to Bloomberg, China is preparing to tackle the massive backlog of unpaid bills owed by local governments to the private sector, an amount of arrears some have estimated at over $1 trillion.

Of course, since there is no actual "loose cash" floating around in China, in another financial MC Escher painting, Beijing will need to take out more massive loans to repay bills that couldn't be repaid because of too much debt. The government is considering asking state lenders and policy banks, including China Development Bank, to lend to local authorities so they can make the payments in arrears. 

The amount of money under discussion would plug at least 1 trillion yuan ($140 billion) of debt owed to private companies in the first phase of a longer-term initiative. Officials aim to complete the task by 2027, according to the people.

What this means is that Beijing's massive subsidy engine is about to go into turbo overdrive, and the world is about to be flooded with below-cost crappy EVs and enough solar panels to cover the Sahara.

President Xi warned in a February speech made public last month that the government’s delayed payments to companies risk undermining people’s trust in the authorities. Underscoring the importance Beijing is placing on the issue, China’s top leader said unpaid bills could “cripple” affected businesses in the embattled private sector and were hurting "society at large."

Of course, while the proposed assistance would offer relief to private-sector contractors, it would shift more risk onto state banks that already face rising loan losses, and is why gold just continues to surge day after day. 

Local government-related entities in China are estimated to owe 10 trillion yuan, or about $1.4 trillion, to corporates and civil servants, equivalent to 7% of the country’s gross domestic product last year, according to economist David Li Daokui’s estimate. Hilariously, China's GDP continues to grow at a fixed 5% every single year. Which means that the government is now directly funding all of the growth with even more debt! 
 

Caitong Securities said in a report last week that China may allocate about 200 billion yuan in special bonds this year to settle overdue payments to companies, based on projections for land-reserve and project-construction special bonds.

The nudging has already begun, and in recent months, authorities have instructed the nation’s major banks to provide support for the initiative, including asking them to give short-term liquidity loans to regional governments to settle overdue bills tied to their affiliated entities. While such debts are typically not owed by the local governments, they are responsible for repayment because they are backing the entities in debt. The policy may need further backing from regulators, as bankers are concerned about potential risks and need some form of assurance they won’t be held responsible if the advances turn bad, one of the people said.

Bottom line: now we know why there has been such a surge in Chinese stocks in recent days; the simple answer: after the latest $1 trillion debt transfer from the private sector to the government, all risk assets will benefit while China's consolidated debt is about to explode even higher, which also means that the recent spike in gold and crypto isn't ending any time soon. 

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