China starts local government debt swap programme
CHINA has begun a programme to allow local governments to swap so-called “hidden” debt for bonds carrying lower interest costs, as it seeks to defuse risks from US$9 billion of off-balance sheet borrowing.
The Inner Mongolia region issued three “refinancing” bonds worth US$9 billion, with maturities between three and seven years, the Shanghai Securities News reported, citing an official document.
Bloomberg reported earlier that Beijing will allow provincial-level governments to raise about one trillion yuan (S$187.5 billion) via bond sales to repay the debt of local-government financing vehicles and other state-owned off-balance sheet debt issuers.
“This means that this year’s special refinancing bond issuance has officially kicked off,” Huachuang Securities analyst Zhou Guannan said, adding that the programme will help resolve debt risks in areas with high debt pressure, and more issuances will follow.
The programme is being closely watched because debt servicing costs are increasingly limiting local governments’ ability to deliver fiscal support to the economy, dragging on China’s growth. The risk of an unexpected default by local-government controlled financing vehicles also raises financial stability risks.
The Shanghai Securities News, a state-run newspaper, added that as part of a “special rectification” campaign for hidden debt, a “closed loop” system would ensure that officials are held accountable for debt issuance.
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Chinese local government off-balance sheet debt, or hidden debt, is mostly concentrated in local government financing vehicles (LGFVs), set up to finance construction projects such as roads and social housing.
Such companies, while state owned, often borrow at close to market rates and at short maturities. The debt swap programme will shift the debt burden to provincial governments instead but at a lower interest rate and longer maturities.
Bloomberg reported earlier that authorities have identified 12 provinces and cities as “high-risk” areas where more support will be provided – including the provinces of Guizhou, Hunan, Jilin and Anhui, as well as Tianjin city.
The total amount of refinancing bonds planned is small relative to the total amount of LGFV debt which the International Monetary Fund estimates will reach 66 trillion yuan this year.
But the announcement of the scheme has prompted Chinese investors to warm to LGFV debt, with the platforms able to issue a large amount of bonds at lower rates than earlier this year.
Some economists are calling for more to be done. Recent policies on local government debt have been “emergency measures” which haven’t touched on the “core problem,” Xu Gao, chief economist at Bank of China International, said in remarks published online this week. BLOOMBERG
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