China’s solution to local governments’ debt crisis: issue more bonds

The Treasury Department of the Ministry of Finance of China said recently that the issuance of treasury bonds and local bonds will remain large-scale in 2020 to avert a sharper economic slowdown.

Chinese Prime Minister Li Keqiang once again emphasize the importance of the reserve requirement ratio (RRR) cut. At the same time, many places have received 2020 new special debt quotas issued by the Ministry of Finance in advance.

Li Keqiang said on the 23rd that “the state will look to adopt various measures such as RRR cuts and targeted RRR cuts, refinancing and re-discounting, to reduce real interest rates and comprehensive financing costs, and to significantly ease the financing difficulties of small and micro enterprises.”

According to a Reuters report on December 25, a person from a bank in Beijing said, “I don’t think RRR rate cut is unexpected this time. This is definitely for local debt. It may be worth 700-800 billion yuan (RMB) in January. The pressure is very high, and banks will be forced to lend in January. There is no money to lend without RRR cut. “

Industry insiders expect that the issuance of local bonds at the beginning of next year will increase significantly year-on-year. Although there is a Chinese New Year holiday in January, the issue size may reach 800-900 billion yuan (RMB), up to 2 trillion yuan.

The latest report issued by China Merchants Securities predicts that the issuance of local bonds in the first quarter may reach 2 trillion yuan, higher than the 1.4 trillion yuan in the same period last year, and the issuance will be scheduled earlier than prior years due to supply pressure in the first quarter.

The issuance time of local bonds in 2017 and 2018 was in February; in 2019, it was moved to the end of January when the total scale of local bond issuance in the month reached 417.976 billion yuan.

The issuance of local bonds in 2020 is ahead of previous years. At present, many places have received the 2020 new special debt quota issued by the Ministry of Finance in advance. So far, Sichuan Province, Qingdao City, Zhejiang Province, and Hunan Province have disclosed a total of 154.63 billion yuan.

Among them, Sichuan Province will become the first province to issue local bonds, and the first batch of 2020 special government bonds will be issued on the first working day (January 2, 2020) after the holiday. According to the news released by the Sichuan Provincial Department of Finance: Sichuan Province has added 62.4 billion yuan in special bonds in 2020.

The Chinese Ministry of Finance stated at the end of November that it previously issued a quota of 1 trillion yuan for some new special debt in 2020, about 47% of the 2.15 trillion yuan of new special debt for the year 2019. The requirement states: “every locality should do a good job in issuing and using special bonds, and issue and use them early to ensure that they can be used early next year to see results.”

The Treasury Department of the Ministry of Finance of China recently held Treasury Bonds Conference in the fourth quarter of 2019. The Chief of the Treasury Department, Wang Xiaolong, said that in the context of the slowdown in fiscal revenue growth, government bond financing must play a greater role, and the issuance of government bonds and local bonds will remain larger-scale in 2020.

Data shows that as of December 13, China’s national debt has increased by approximately 4.03 trillion RMB this year, account for 96% of the planned annual issuance. A total of 4.34 trillion yuan local bonds were issued, of which new bonds, refinancing bonds, and replacement bonds were issued at 3.03 trillion yuan, 1.15 trillion yuan, and 160 billion yuan, respectively.

Issuing a large number of local debts is an attempt by local governments to use infrastructure investment to stimulate economic growth. State media Shanghai Securities News reported on October 24, “After entering the fourth quarter, major projects have started with the help of special debts from local governments. Jiangsu, Hubei, Jiangxi, Henan, and other places kick-started several major infrastructure projects with 10-billion-yuan investment. “

Chinese Finance Minister Liu Kun admitted the so-called hidden government debts earlier this year at a press conference at the Second Session of the 13th National People’s Congress of the Communist Party of China. Some local governments violated laws or regulations by borrowing in disguise.

The local debt risk has been masked by the continuous borrowing to pay back “old debts” with “new debts”.

Deputy Director of the NPC Finance and Economic Committee detailed a series of deep problems facing the Chinese economy at a forum in Beijing back in 2018. When talking about local government debt, he said that the total local debt of China was about 40 trillion yuan (in 2018), but none of the local governments wanted to repay their debts, and many couldn’t even afford to pay interest. “If the local governments are asked to pay their debts, they would say that they cannot even afford to pay salaries to local government employees due to financial difficulties. What should I do? I can’t afford to pay back the debts now, and I cannot even pay the interest on the debt.”

Source: Chinese State Media

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Dec. 27, 2019