China's Debt_ Defusing a bomb

The Economist

China’s local government debt

Defusing a bomb

Mar 11th 2015, 3:44 by S.R. | SHANGHAI


EVER since China’s gargantuan stimulus of 2009, which was unleashed to repel the global financial crisis, there have been concerns about how the debts incurred during that spending binge would be repaid. The finance ministry took a big step this week to address the overhang, introducing a programme to restructure the liabilities of local governments, the most indebted of China’s public institutions. China still has a long way to go to fix its finances. But after years of first denial and then dithering, it has at least started the clean-up operation.

To begin with, local governments will be allowed to swap 1 trillion yuan ($160 billion) of their existing high-interest debts for lower-cost bonds. According to the Economic Observer, a credible local newspaper, this may just be the first tranche, with the finance ministry preparing to give local governments a 3 trillion yuan quota for refinancing. It is easy to imagine that such quotas will become a regular feature of China’s fiscal landscape over the next few years. As this chart shows, the combination of new debt issuance plus swaps will help cover what local governments owe this year, but will make only a small dent in their overall liabilities.

At this point, some readers will be scratching their heads. ‘Surely, this just amounts to kicking the can down the road’, they might be thinking. Pardon the mixed metaphors, but a better way of looking at it is that China will be whipping the can into better shape down the road.

China’s local-government debt problem has always been twofold. First, there is the sheer amount of money they owe. That has doubled from less than 20% of GDP in 2007 to nearly 40% today. Second, there is the very peculiar and opaque structure of these liabilities. Because local governments can only borrow with the explicit permission of the finance ministry, which has been miserly in the past, they have been forced to use off-balance-sheet entities to raise funds. Those entities (commonly known as local government financing vehicles, or LGFVs) have borrowed from banks and shadow banks alike. As a result, the size of their debts is unclear, but it is certain that the cost of their debts is much higher than would have been the case had they issued bonds in the first place.

The debt swap is aimed squarely at the second problem. Lou Jiwei, China’s finance minister, calculates that local governments will save 40-50 billion yuan this year alone in interest costs thanks to the refinancing. Back of the envelope, this implies that local governments are paying interest rates 4-5 percentage points above the prevailing treasury yield (about 3.5% on ten-year bonds) on the debts that will be swapped. This is an absurd and costly anomaly. By correcting it China will also contain, though not solve, the first problem: the outstanding debts. The pile has gotten big enough that interest costs are almost inexorably adding to leverage. By controlling these costs, China limits the future build-up of unnecessary debt.

The swap gives rise to new questions, three of which are particularly important. First, who loses? As in any restructuring, there will be some pain for creditors as their high-yielding assets are exchanged for lower-yielding bonds. Yet this concern is overblown. Although returns will be lower, creditors will trade that for the security of knowing they will be repaid. Moreover, banks, the main group of creditors, will be able to treat the new bonds as lower-risk assets, reducing their capital charges.

Second, does this mean that China is ramping up its fiscal stimulus? Debt issuance by local governments this year, including the refinancing, will be at least three-times higher than last year's total. But this is not a useful way of framing the debt swap. It is dealing with a legacy issue, not freeing up more cash for local governments to spend. This year’s budget calls for the deficit to reach about 2.7% of GDP, up from 2.1% last year. As far as stimuli go, that is a mild one.

Finally, what about all of China’s other debts? These, alas, will remain a major concern. The cabinet previously ruled that only a portion of off-balance-sheet local liabilities would be treated as full-fledged government debt. The swap programme demarcates that which the public purse will cover from that which it will not. Wei Yao of Societe Generale, a French bank, reckons that local debts have reached as high as 30 trillion yuan. A 3 trillion yuan swap leaves the rest more exposed to default risks.

Moreover, the biggest debtors in China in recent years have been corporate bosses, not local officials. The debts of non-financial companies reached 125% of GDP by the middle of last year, up from 72% in 2007, according to McKinsey, the consultancy. These are well outside the remit of the refinancing programme. China’s debt mountain looks a little safer thanks to the swap, but it is still large and menacing.

***
Chân thành cám ơn Quý Anh Chị ghé thăm "conbenho Nguyễn Hoài Trang Blog".
Xin được lắng nghe ý kiến chia sẻ của Quý Anh Chị trực tiếp tại Diễn Đàn Paltalk: 1Latdo Tapdoan Vietgian CSVN Phanquoc Bannuoc . 
Kính chúc Sức Khỏe Quý Anh Chị . 



conbenho
Tiểu Muội quantu
Nguyễn Hoài Trang
13032015
___________
Cộng sản Việt Nam là TỘI ÁC
Bao che, dung dưỡng TỘI ÁC là ĐỒNG LÕA với TỘI ÁC