Opinion
Cracks are appearing in China’s financial markets as investors fret about the hefty debt loads of local governments. That’s bad news for commodity exporters.
Karen MaleyColumnistChina’s financial markets are feeling the first tremors of the looming $15.3 trillion local government debt crisis, which threatens to further derail the country’s fragile economy.
Last Friday, Wuhan, a city in central China, publicly named hundreds of debtors in a local newspaper article, in an effort to put pressure on them to pay up.
Wuhan’s local finance bureau printed a list of 259 entities, which it says collectively owe more than 300 million yuan ($65 million). According to the page-long article, efforts to recoup the money by writing to debtors had failed, and the Wuhan bureau now urged those named to “immediately perform the relevant statutory debt repayment obligations”.
This public pressure on Wuhan’s debtors came only days after the southwestern Chinese city of Kunming was forced to deny market rumours that its local government financing vehicles were finding it difficult to repay debts.
All the same, investors received payment on the maturing bond only after business hours, suggesting a last-minute scramble to find the funds.
Chinese bond investors are becoming increasingly concerned about the financial robustness of local government financing vehicles (LGFVs), which are saddled with an estimated $US10 trillion ($15.3 trillion) in debt.
Borrowings by these entities exploded following the financial crisis, when Beijing encouraged LGFVs to play a key role in funding Chinese infrastructure projects, one of the big drivers of growth for the world’s second-largest economy.
But as China’s post-COVID-19 economic rebound sputters, investors are becoming increasingly worried that some cash-strained local governments might be tempted to allow some LGFVs to default on their borrowings.
Impact on confidence
These worries are already reflected in Chinese credit markets. Already more than 10 Chinese provinces have found themselves, in effect, locked out of the domestic bond market, which means they’re unable to issue enough new bonds to repay maturing debts.
Jitters over a looming debt crisis are also blamed for eroding confidence more broadly. After rallying strongly in the early months of the year, China’s CSI index has now had all its gains for this year wiped out. Meanwhile, the Chinese yuan has weakened to below the psychologically important level of 7 against the US dollar.
The finances of regional governments are under pressure as the country’s economic recovery falters, and the property sector’s continuing problems have caused land sales to collapse.
China’s economy has failed to rebound as robustly as expected after the Draconian zero-COVID rules were loosened at the end of last year. The latest figures for industrial output, retail sales and credit growth came in well below expectations, suggesting that at best China’s growth this year will be in line with Beijing’s target of about 5 per cent.
Meanwhile, in the country’s embattled property market, sales are slowing after an initial rebound, and debt-laden local governments are pulling back on infrastructure spending.
Servicing the debt
Fears that China’s economic recovery is faltering are also reflected in declining commodity prices. The price of iron ore, a crucial ingredient for steelmaking, has fallen 23 per cent from its March high.
China’s flagging growth outlook is also exacerbating the country’s debt problem. In the past, the economy was able to rely on rapid economic growth to alleviate its debt strains.
But slower growth means it’s difficult for revenue to keep pace with the growth in total Chinese debt – including governments, companies and households – which has now ballooned to more than 300 per cent of GDP.
Investors are particularly worried about the ability of LGFVs to continue servicing their debts, particularly since many of the infrastructure and property projects they backed are uneconomic and are delivering investment returns well below the cost of debt.
At the same time, Beijing is showing an increased resolve to impose financial discipline on local and regional governments. It wants to discourage them from using the off-balance sheet borrowings of their LGFVs, and instead rely on bonds backed by the central government.
But Beijing’s crackdown on local and regional government finances comes at a time when many are experiencing severe financial strains from slowing activity. Last year, local tax revenues fell almost 10 per cent and revenues from land sales plunged by more than 25 per cent.
Short-term solution
That leaves local and provincial governments with the problem of whether to use part of their dwindling revenues to repay the borrowings of their LGFVs.
Of course, the local authorities will be reluctant to default in the first instance. Instead, they are likely to lean on regional banks to provide financing to the LGFVs, allowing them to repay maturing bonds.
But this strategy is only a short-term solution. It will lead to questions about the financial robustness of the regional banks, making it more difficult for them to raise funding from investors and depositors.
China’s economic rebound was already on shaky ground. The growing strains on local and provincial governments as they grapple with the massive $15.3 trillion of borrowings accumulated by their financing arms threatens to further derail the recovery of the world’s second-largest economy.
And that suggests that prices for Australia’s key commodity exports – such as iron ore and coal – have even further to fall.
China's looming $US15.3t local government debt crisis - The Australian Financial Review
Read More
No comments:
Post a Comment