China reduces local government debt
China is the most dynamic place that I’ve ever visited. I went numerous times in the 1990s and was always impressed with the vitality of the people. You could hear Beijing or Shanghai or Wuxi humming with energy from the early morning until late in the evening. I remember landing back in an American airport and thinking how low the energy level was here. Of course all this is reflected in the economic performance of the two countries.
The Chinese government has liberalized the economy a lot since I visited there, but it is still an odd hybrid of command-and-control and a free market. This seems to be true of their municipal market, too. Reuters has an excellent exclusive today on how the Chinese national government is helping shift a substantial amount of local government debt off their books:
China’s regulators plan to shift 2-3 trillion yuan ($308-463 billion) of debt off local governments, sources said, reducing the risk of a wave of defaults that would threaten the stability of the world’s second-biggest economy.
As part of Beijing’s overhaul of the finances of heavily-indebted local governments, the central government will pay off some of their loans and state banks including some of the “Big Four” will be forced to take some losses on the bad debt, said the sources, both of whom have direct knowledge of the plans.
Many analysts see China’s pile of local government bad debt as a major risk to the economy, especially as the economy slows, but few see widespread banking fallout as they believe cash-rich Beijing can step in to soak up losses.
China is propping up local governments with this move. The U.S. federal government has publicly ruled out a similar action, although Illinois, California and a few others face substantial challenges. This refusal is odd because the United States is willing to participate in the bailout of Greece and other countries through the IMF. I think most Americans would prefer we support domestic state and municipal governments rather than propping up foreign governments and banks. We don’t have the wealth to do both.
The other interesting part of the Reuters piece had to do with Beijing loosening the rules for municipalities to issue bonds:
Beijing will also lift a ban on provincial and municipal governments selling bonds, a step aimed at bolstering their finances with more transparent sources of funding.
It seems that this move is the next step in the liberalization of their muni market. An earlier step was reported in the China Business Journal in 2009:
Local governments may be allowed to issue bonds as early as this February, the China Business Journal reported in its latest issue.
The Chinese government has accelerated the removal of restrictions on municipal bonds issuance in an effort to further spur consumption and prevent economic slowdown. Sources said that the State Council will announce a municipal bonds quota for each region on January 20.
However, the bonds will be issued by the Ministry of Finance (MOF) instead of by individual local government authorities. According to MOF sources, the municipal bonds will be 3-year papers and can be traded on the interbank and stock markets.
So the first step for the Chinese muni market was for the national government to issue bonds for local governments. The interdependence between the two levels of government in China seems amazing. I wonder what best practices are being used around the world in domestic municipal bond markets. If you have any information please leave it in the comments.