China Will Try To Evaluate The Level Of Local Debt And To Clean It

The WSJ recently published an article which shows that Chinese officials seek clear view of government debt mountain. It noted that, in the next few weeks, Beijing is expected to release the results of an audit of how much the country’s local governments have borrowed over the past few years.

 

The article underlined that estimates vary widely that they range from $2.46T to $4.92T, which equals nearly 30%-60% of GDP.

 

Economists worry that the debt will weigh on economic growth by constraining further public investments. There is also the worry that the central government will let some local governments default to show that it wont back all of this debt, potentially triggering a sell-off in these bonds and hurting investors.

 

However, the article also added that China has enough cash to prevent bonds from defaulting and absorb losses to avoid a crisis.

 

More from WSJ:

 

In the next few weeks, the Chinese government is expected to release the results of an ambitious effort to calculate a seemingly simple figure: just how much the country’s local governments have borrowed from banks and investors in the past few years.
 
Government officials, analysts and economists have offered numbers that range from 15 trillion yuan to 30 trillion yuan ($2.46 trillion to $4.92 trillion), which equals nearly 30% to 60% of gross domestic product.
 
“Local government debt has been growing at a speed of nearly 20% a year in the last couple of years. If this trend continues, it will definitely bring about systemic risks for China’s economy,” said Nomura economist Zhiwei Zhang.
 
The numbers matter a lot to Beijing. Analysts say it could be on the hook for a significant portion of that debt if it goes bad, and yields on many of the bonds reflect the expectation that the central government would back the bonds. If the debt is backed by Beijing, they argue, it should be considered part of China’s national debt, pushing that total to a worrisome 200% of GDP, up from 129% at the end of 2008, according to Fitch Ratings.
 
Another worry is who would lose if some of that debt went bad. According to Standard & Poor’s, 80% of local government bonds are owned by Chinese investment firms, which manage money for individuals and insurance companies, and some of the bonds have ended up in wealth-management products sold by banks to individuals.
 
Beijing has enough cash to prevent bonds from defaulting and absorb losses if they do, and there is no immediate threat of a local government debt crisis. The worry among economists is that the debt will weigh on economic growth by constraining further investments.

 

Facing this problem, another press report noted that China looks to municipal bonds to clean up local governmentt debt. Reuters reported that Beijing may decide next month to expand a trial program allowing local governments to sell municipal bonds. The main goal is to response to concerns that their huge borrowings are largely hidden and pose a risk to the stability of the financial system as we showed above.

 

More from Reuters:

 

China may decide next month to expand a trial programme allowing local governments to sell bonds, in response to concerns that their huge borrowings are largely hidden from view and pose a risk to the stability of the nation’s financial system.
 
A government think-tank that advises China’s cabinet, the Development Research Center, has put forward a proposal calling for greater use of municipal bonds ahead of a policy-making meeting next month to decide Beijing’s long-term reform agenda.
 
Local government debt totals up to $4 trillion or 42 percent of gross domestic product, according to some unofficial estimates, but much of it has been raised via financing vehicles that do not disclose details on the size and health of loans.
 
Economists say a real municipal bond market would be key to addressing the local debt issue, with disclosure requirements helping to impose a hard budget discipline on local officials.
 
In another sign authorities are poised to expand municipal bond issuance, another influential think tank, the China Academy of Social Sciences, teamed up with a major credit ratings agency last month to issue ratings of local governments.