New Chinese stimulus is a "Great Leap Forward"

Even the Chinese financial press is skeptical of the latest infrastructure projects, such as Hubei's plan to build 1185 km of highway over the next eight years as part of a ￥4 trillion plan for a 9 province expressway, dubbing the new stimulus an infrastructure investment "Great Leap Forward."

These projects need financing and the financial system is already strained from top to bottom: Chinese are draining money supply through dollar hoarding and the banks are seeing rising NPLs. it was the 2008 stimulus that sucked capital out of the private economy and sent "black market" interest rates to over 100% per annum in Wenzhou. That same stimulus left many non-performing loans on the books of banks, some already qualify as NPL, with others becoming non-performing as the economy weakens. Another round of the same type of stimulus will be even less effective than the 2008 stimulus, with fewer profitable projects left on the shelf, thus even more NPLs down the line.

This is central planning at its worst and the net result will be inflation. Exports to Europe and America weak and market sentiment on the yuan has turned. The seeds for a serious renminbi devaluation are being planted.

基建投资“大跃进” 湘鄂赣皖共建“祖国立交桥”

Here's English coverage:
China's local governments go their own way

Beijing’s announcement came after the bold $130 billion investment plan revealed by Changsha last week, a large industrial city in central China. There are doubts about whether the city had enough financial firepower to implement the ambitious plan.

“Financing is a problem,” said Zhang Zhiwei, Nomura’s Chief China economist. “To what extent this plan can be realistically implemented largely depends on access to bank loans,” he told the Financial Times.

Answering the question of financing is the WSJ: Chinese Banks Step Up Lending to Local Governments Amid Stimulus

The shift reflects a change in priorities for China as growth has slowed. To support the economy, Beijing has turned to boosting investment such as infrastructure projects which are often overseen by local governments and funded through lending by state-owned banks.

Much of the lending is channeled through local-government financing vehicles--platforms set up by those governments to get around legal limits on their direct borrowing from banks.

"Last year we selected one out of 10 platforms to lend to, but we can choose three to five out of 10 now," a banker at a major state-owned bank told Dow Jones Newswires.

Note the changing priorities:

Last year, Chinese banks abruptly cut back on lending to local governments, as concerns mushroomed that they had borrowed too much and couldn't keep up with payments. But now, responding to new policy guidance from above, Chinese banks have begun to loosen up.

However, banks and regulators are still being more cautious than during the stimulus-driven lending binge of 2009 and 2010, trying to differentiate between credit-worthy local-government projects and others.

That's like differentiating between subprime borrowers. The credit worth borrowers are the private businesses starved of capital. Instead, China will once again begin a massive wave of capital destruction. At some point, even financial repression cannot hide the mounting losses.