Chinese Leaders Proclaim End To Government Bond Risk Backstop, Look To Detroit For Guidence

Xu Zhong, head of the People’s Bank of China’s research bureau, is in an unusual position. In a nation known for government intervention in free market forces, he recognizes the slippery slope of the moral hazard of the government bailing out risky lending practices. Looking at how local Chinese governments have become over-leveraged, he says the world’s second-largest economy needs a bankruptcy process for local governments, using Detroit as an example. The central government needs to send a message that it will not give blanket bailouts for irresponsible practices, he says, amid mounting concern. The warning comes as the Bank of International Settlements and a wide variety of international finance organizations have been noting the fears.

[dalio]