China takes another step toward municipal borrowing

Last January, when I made my predictions for 2014, I wrote:

The biggest muniland story this year will be the development of the Chinese municipal bond market. It’s not often that you get to watch a government launch a bond market. And China’s will be massive. From the South China Morning Post:

The [Chinese] mainland’s quest to solve its $3 trillion-and-growing public debt problem by starting a domestic municipal bond market hinges on the one thing officials are most afraid of: transparency.

As markets absorb the results of the latest audit of state finances, Beijing’s long-standing vow to develop a municipal bond market to curtail rapid growth in other types of hidden public debt will take centre stage once more.

Now the Chinese State Council is poised to take the next step in approving guidelines that mean local governments will be allowed to issue debt. reports:

State Council would set quota system on debt, but only under strict conditions.

China may allow local governments to sell municipal bonds under narrow parameters in a move to regulate their borrowing and reduce systemic risk.

Should China build a muni market?

Reuters reported on the possibility that China’s government will take the next step in building a municipal bond market. It seems that local governments in China have accumulated a lot of debt and it needs to moved off their books. From Reuters:

China may decide next month to expand a trial program 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.

How big is this debt?

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.

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.

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