Date
25 May 2017
China is again engineering a soft landing for its state-owned banks, which are heavily exposed to debt-ridden local governments. Photo: Bloomberg
China is again engineering a soft landing for its state-owned banks, which are heavily exposed to debt-ridden local governments. Photo: Bloomberg

China bailing out local authorities by allowing huge bond issues

China is bailing out its heavily indebted local governments, allowing provinces to issue at least 2.6 trillion yuan (US$419 billion) in bonds this year to stave off a debt crunch, The Wall Street Journal reported.

These are the first local government issuances in more than 20 years.

Local authorities have accumulated about 18 trillion yuan, equivalent to a third of China’s economy, in bank loans and bonds to fund risky land and property deals.

As the real-estate market slows, state-owned banks that did much of the lending are vulnerable.

The municipal bonds are aimed at allowing local governments to refinance short-term bank loans, which carry high interest rates of 7 percent.

The tactic amounts to a public bailout of the state-owned banks, similar to the one in the 1990s.

Back then, the government pumped billions of dollars in fresh capital into the banks and carved out bad loans from the lenders. Only about a fifth of the soured debt was ever recovered.

At least two provinces were forced to postpone bond sales earlier this year because the low yields resulted in weak demand from private investors and state-owned banks.

Beijing directed state-owned lenders last month to buy the bonds, effectively swapping them for higher-interest loans.

As an enticement, the government is allowing banks, which face a squeeze on income because of the lower interest rates they are getting, to use the bonds as collateral for low-cost loans from the central bank.

This approach seems like shifting around state resources, the report said, citing analysts.

“The debt swap is effectively a debt restructuring for banks,” Zhu Haibin, JPMorgan Chase & Co.’s chief China economist, was quoted as saying.

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RC/FL

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