China looks set to give a big boost to its nascent muni-bond market this year. The Finance Ministry is to quintuple the quota for local government bond issuance to 250 billion yuan ($40 billion) this year, Caixin, a Beijing-based financial newspaper, reports.
In addition, more provinces will reportedly be added to the list of those able to issue bonds directly. Since 1994, the ministry has done that on behalf of local governments but started an experiment in direct issuance in October last year with Shanghai, Shenzhen, Guangdong and Zhejiang. That privilege will be extended to six more provinces and municipalities. The ministry is expected to maintain the close control over the bond issuance by the larger group that it has exercised over the trial quartet, including having a big say over what the funds raised can be used for.
Expanding the muni-bond market is both part of the broader reforms of the financial system and local government finances. The latter are teetering under the burden of 10.7 trillion yuan of debt, at least 3 trillion yuan of which falls due by the end of this year. Much of the debt piled up as a result of the stimulus spending in the wake of the 2008 global financial crisis. Much of it is infrastructure loans, for things like toll roads to nowhere, that are weighing heavily on the creditworthiness of China’s banks.
Earlier this month the China Banking Regulatory Commission ordered banks to clean up their balance sheets with regard to local government lending. It first told them to do that in June last year, but progress clearly hasn’t been rapid enough, or, as a result of the cooling of both the economy and the property market, problem loans are mounting. Good and bad loans alike were probably rolled over when banks tackled the 2 trillion yuan of local government loans that fell due last year. Another red flag raised by China’s audit office: irregularities it has found with 530 billion yuan worth of the lending. Taken together, an estimated 2 trillion-3 trillion yuan of local government lending has soured, which would be sufficient to raise the banks’ non-performing loan ratios to 5% from their current average of 1.1%.
The new quota of 250 billion yuan for bond issuance won’t wipe away the problem but every little bit helps–and places like Greece serve as a reminder that bond issuance is not an infallible inoculation against government profligacy. Yet while the immediate priority is to deflate China’s local-government debt bubble before it can go damagingly pop, an expanded muni-bond market also pushes provincial and municipal governments in three other desirable directions: less reliance of land sales to raise revenue, less need for the off-balance sheet financing via captive investment vehicles that local authorities have resorted to get round restrictions on official borrowings, and more transparency generally about their finances.
This is an edited version of a post first published by China Bystander.
Filed under Banking, China
There were no great expectations of China’s fourth quinquennial national financial work conference that has just ended in Beijing. And it seems to have met them.
These two-day meetings of top political leaders and policymakers set broad policy objectives for the coming five years. In the past they have provided a blueprint for significant financial-system reform. But with a leadership transition already underway, the start of a new five-year plan and growing nervousness among policymakers and political leaders alike about the volatile outlook for the global economy and the potential implications for China’s growth, there is no great appetite for much beyond keeping a steady ship.
“Risk-aversion should be the lifeline of our financial work,” said Prime Minister Wen Jiabao. He also said that there would be greater supervision of the banks, which, he said, needed to improve their governance and risk management.
Risk control and prudent macroeconomic management were the order of the day, as they were at last month’s annual economic work meeting. “Making progress while maintaining stability,” is the mantra. The emphasis is currently on the stability.
More detail about the financial work meeting will likely drip out over the coming days. The post-meeting statement dealt in generalities, but two leading topics of discussion were the currency and interest rates. Moves towards more market oriented interest rate mechanisms are necessary if China is to become more efficient at capital allocation, as it needs to be as its economy develops from its invest and export model of the past three decades. But steps have been tentative in the face of some vested interests who have thrived on cheap and ready bank loans. We expect the equally tentative steps to develop bond markets to be given priority over interest rate liberalization, with provincial and local governments being given more scope to sell bonds to firm up their finances. However, when it comes to developing a corporate bond market, don’t underestimate the political task in getting the big state owned enterprises to be supportive of a new source of credit that will be more demanding of their performance.
The internationalization of the yuan is also likely to continue at a measured pace, while the exchange rate against the dollar won’t be allowed to drift much higher. Policymakers feel that with the trade surplus shrinking the currency is at the right sort of level. It has risen by a third since the peg with the U.S. dollar was first broken seven years ago. Wen said China “will steadily proceed with efforts to make the renminbi convertible under capital account to improve its management of the foreign-exchange reserves”–though that is pretty much boilerplate.
This is an edited version of a post that first appeared on China Bystander.
Greece’s unexpected decision to hold a referendum on the euro-zone’s proposed bail-out has been a gift horse for China as it gives Beijing even more time to get the rest of the world used to the fact that it will be chipping in no more than a widow’s mite at best. China’s contribution to the euro-zone’s would-be 1 trillion euro bail-out fund, the European Financial Stability Facility (EFSF), has always been more likely to be more token than substantive, regardless of any wishful thinking on the part of China’s largest trading partner. Now, says deputy finance minister Zhu Guangyao, speaking ahead of the G-20 meeting in Cannes, “the fund has not established details of its investment options so we still can’t talk about the issue of investing”. The head of the fund, Klaus Regling, was in Beijing last weekend with his collection tin, but went away empty handed for reasons outlined here. Beijing is no more willing than Berlin, Brussels or Paris to take on the risks of loss. Why should anyone be surprised otherwise?
China will play its usual defense against the moves in the U.S. Senate to twist Beijing’s arm to appreciate its currency against the dollar: vociferous denunciation of Washington for turning protectionist and initiating trade wars while patiently waiting out the start of any actual hostilities, calculating that they will eventually recede.
The denunciation has duly come with Foreign Ministry spokesman, Ma Zhaoxu, saying the bill now in front of the U.S. Senate proposing punitive measures against any country that is shown to be manipulating its currency — for which read China — “seriously violates rules of the World Trade Organization and obstructs China-U.S. trade ties”. He told U.S. Senators to abandon protectionism and stop politicizing economic issues. He also told them to “stop pressuring China through domestic law-making”. Similar sentiments have been expressed by the central bank and the commerce ministry.
While perhaps nobody outside the U.S. Congress really believes that a sharp revaluation of the yuan on its own will eradicate America’s trade deficit with China or create the new domestic jobs the U.S. is having such trouble generating, Beijing will know that even if the Democratic majority in the U.S. Senate passes the bill, the legislation will likely founder in the Republican controlled House of Representatives. Even if it does not, it is highly unlikely to survive a presidential veto. That is the past pattern of such proposed legislation. Support for this year’s bill appears to be stronger, helped by its narrower provisions and the background of sluggish U.S. growth and joblessness, but the odds remain long that it will become law.
At the very worst, and the bill does become law, it will be cheaper politically for Beijing to fight any punitive measures through the WTO than it would to be seen to capitulate to foreign pressure. Meanwhile, it can bide its time, letting the gradual appreciation of the yuan that has been underway since June last year (up 7% against the dollar since then and 10% against the euro) ease the U.S. pressure that is anyway likely to abate after next year’s U.S. elections, while buying more time for the economy, particularly the export-manufacturing sector, to adapt.
China’s policymakers are quite happy for the yuan to appreciate. It will help them both fight inflation and restructure the economy. But they want do it to their timetable, not Washington’s — and they have the playbook to do that.
China’s Purchasing Managers’ Index (PMI), an indicator of the outlook for manufacturing, showed an uptick for September, reversing the mostly downward trend of much of the year. As ever, we caution reading too much into a single month’s figures, but the official numbers, released early after a leak of the HSBC version, stand in contrast to much of the bearish sentiment about China’s economy seen over the past week as investors have been swept up in a global glumness that the world economy is heading for a double-dip recession.
The glass half-full is that if the slowdown in China’s growth is stabilizing, even temporarily, it provides some hope that it can sustain some global growth at least for a while. And when we peer deeply into the glass, we see that HSBC’s input-price sub index showed a slight increase, to 59.5 from 55.9, suggesting a possible brake to the decline in global commodity prices seen since April as demand has weakened. The glass half-empty is that manufacturing usually increases in September in preparation for the Golden Week holiday.
September PMIs from around the world, though sending mixed signals, follow other indicators that show that, even if a double-dip recession can be avoided, the slowdown in growth worldwide is becoming entrenched. Matters haven’t slid back to the nadir of the 2008-09 slump, but they are not far off.
The danger is that protectionist pressures will force those two points closer. In the U.S. Senate, legislation is being discussed that would make it easier for punitive tariffs to be imposed on countries deemed to being manipulating their currencies, for which read China. World leaders did well to get through the 2008-09 slump by collectively agreeing not to go down that beggar-thy-neighbor road. That consensus is considerably more fragile today.
This post was first published on China Bystander.
China’s GDP growth will slow to less than 5% a year by 2016, according to three out of every five of the more than 1,000 global investors, analysts and traders who responded to a Bloomberg poll. More than one in eight thought that would happen within a year, and nearly half thought that such a slowdown would occur in two to five years. Potential property bubbles, bad bank debt, persistent inflation and extended weak demand in US and European export markets were the cause of the pessimism.
This Bystander is tempted to recall the Japanese political saying that an inch in front of your nose is darkness. The economic forecasting goggles that can clearly see five years out are yet to be invented, let alone the night-vision version. Few in 2006 thought the world would look in 2011 as it does. We don’t doubt that China’s economic growth is more likely than not to slow from the double-digit growth rates it has averaged over the past three decades. The natural arc of development and demographics all but ensure it. Yet, a fall to 5% annual GDP growth would constitute “a hard landing” in our book, even allowing for the mitigating effects of variables like the speed of the deceleration, the impact on jobs and the composition of the economy at that point.
The new five-year plan, to 2015, assumes an annual average of 7% growth over its life, which might, arithmetically, mean there will have to be some 5% growth rates towards its end to balance out the current 9%+ growth. Yet we have always taken the official 7% figure to be unrealistically modest, signaling domestically that growth would inevitably slow, but giving the Party plenty of room to gloriously overdeliver on its underpromise.
A 5% growth rate in China would have serious consequences for the global economy as well as domestic stability. We accept that all the reasons to be bearish cited by respondents to the Bloomberg poll are legitimate risks to growth. As we have noted before, progress on economic reform is going to be slow for some years, which will make the necessary changes to the structure of the economy harder to bring about. The sheer size of the economy also makes sustaining percentage increases harder each year. A $6 trillion economy growing at 7% a year needs to add $420 billion of GDP in the first year but $550 billion in year five. Plus the Party’s reliance on infrastructure spending to carry the economy through rough spots, is going to run its course at some point. The growth in the debt outpaces the growth in the ability to repay it. Yet, these are challenges, not inevitabilities. If the global conventional wisdom about China is as gloomy as the Bloomberg poll suggests, we are only reinforced in our view that there is a case for greater optimism.
First published on China Bystander.