How China's Hidden Debt Is Getting Even Riskier

In China, debt takes many shapes – on the books, off the books, or buried deep within the financial system. Now, debt can even be considered equity, Reuters reported. In a bid to boost the economy, China this week announced it would allow local governments to borrow more to fund infrastructure investment. As part of this push, it will let municipalities use the proceeds of special-purpose bonds as equity in railroad, highway and other projects. 2 Previously, local governments weren't able to use such debt as seed capital. Using debt proceeds to fund equity is a dangerous proposition. Typically, equity holders take on extra risk: They’re the first to assume losses and the last to get paid. That comes with higher returns. When an investment is leveraged, the ups and downs are magnified, too. Debtholders, meanwhile, have the first claim on cash flows, though their returns tend to be lower. Read more

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