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.
The U.S. market is about 23 percent of GDP, or $3.7 trillion. So the amount of local debt in China exceeds the U.S., and it’s not even fully disclosed, structured or regulated? Did the Chinese government really not know this massive borrowing was happening? The government wanted massive fiscal stimulus after the 2008 financial crisis.
Chinese law bans local governments from selling debt directly in a measure that was meant to restrain their borrowings, but local officials have skirted it by raising debt through financing vehicles to fund infrastructure projects.