Breakingviews - China puts $137 bln Band-Aid on local debt wounds - Reuters

HONG KONG, Oct 25 (Reuters Breakingviews) - Beijing is kicking one of its biggest problems down the road. On Tuesday, Chinese lawmakers approved President Xi Jinping’s latest plan to prop up the slowing economy by issuing 1 trillion yuan ($137 billion) of sovereign bonds. The funds are to be funnelled to cash-strapped local governments struggling under 92 trillion yuan ($12.6 trillion) of debt. While useful, the move only buys local authorities some time.

Chinese planners generally avoid tinkering with the central government budget midway through the year. The last time was for a 1 trillion yuan special bond issuance in 2020 to combat the economic fallout from Covid-19. That they are doing so now – and raising the budget deficit limit to 3.8% from 3% - is a clear sign that local governments’ public coffers have been deteriorating more quickly than forecast earlier this year.

The Chinese legislature on Tuesday also passed a bill allowing local governments to frontload part of their 2024 bond issuance quotas, which have not been set yet. All these plans stem from the ruling Politburo in July calling on regulators to formulate “a basket of measures” to resolve risks stemming from local governments’ debt.

Half of the proceeds the national government is raising on their behalf is intended to be spent before the end of the year on projects such as water infrastructure and disaster relief. Assuming that happens, it ought to provide local economies with a bit of a boost.

The amount is small compared with the size of the problem, though. By the end of 2022, the $12.6 trillion of outstanding local government debt included around $9 trillion the International Monetary Fund estimates is held by off-balance-sheet financial vehicles.

Beijing may yet unveil other measures. Some will still be holding out hope for a broader stimulus package that helicopters money to consumers. With the economy now looking on track to grow 5% this year, though, that seems less likely. And it would not resolve the debt issues, which would take a proper restructuring, involving everything from asset sales to allowing some local government financial vehicles to go bust. That’s a painful decision authorities are trying hard to avoid.

CONTEXT NEWS

China’s top legislature approved a plan on Oct. 24 to sell 1 trillion yuan ($137 billion) of sovereign bonds. The special debt issuance will widen the central government’s 2023 fiscal deficit to around 3.8% of gross domestic product, up from the previously budgeted 3%.

The funds raised through the sovereign bonds will be transferred to the public coffers of local governments, with 500 billion yuan to be spent within this year in areas such as disaster relief and water infrastructure.

Separately, the Chinese legislature passed a bill to allow local governments to frontload part of their 2024 bond quotas. They had already been told to complete the issuance of their 2023 quota of 3.8 trillion yuan in special bonds by September.

Editing by Antony Currie and Thomas Shum

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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