China’s 1 Trillion Yuan Muni Issues Show Yet to Kick Debt Habit

  • PBOC has ‘no intention of tightening any time soon:’ RBS
  • April’s social financing accelerates if factoring in munis

Global banks are redoing the math on the apparent slowdown in Chinese borrowing in April to include 1 trillion yuan ($153 billion) of regional government notes. The conclusion: the debt binge is far from over.

Including record municipal bond sales, total social financing jumped 17 percent from a year earlier, the most since 2014, to 1.76 trillion yuan, UBS Group AG estimates. Growth in adjusted total credit quickened to 17.7 percent from 17.1 percent in March, according to Deutsche Bank AG. The official reading, which excludes borrowing by local governments, came out on Friday and showed a 29 percent slide to 751 billion yuan.

The People’s Bank of China was so alarmed by the impression it was less supportive of growth that it highlighted financing by provinces and cities over the weekend. BlackRock Inc.’s Laurence D. Fink, who oversees the world’s largest money manager, is among investors who would rather China grows slower and cuts total debt that was 247 percent of gross domestic product last year, up from 164 percent in 2008.

"The central bank has no intention of tightening any time soon because the recovery is still uneven," said Harrison Hu, chief Greater China economist at Royal Bank of Scotland Plc in Singapore. "Local government bonds are safer than shadow-banking credit, but they do not alleviate the debt burden for local governments; it just lowers the debt servicing cost and extends the maturity of the debt."

QuickTake China's Debt Bomb

Debt Surge

Borrowing by China’s regional authorities started to explode in 2008 during the global financial crisis, when the government urged provinces to boost infrastructure spending. The regional authorities were at the time banned from selling bonds directly and so obtained funding via local government financing vehicles that were set up for specific projects.

Regulators started to allow the exchange of that high-cost debt into newly permitted municipal notes last year, and Finance Minister Lou Jiwei said in March that about 5 trillion yuan of such borrowings will mature in 2016 and need to be refinanced in such a manner. The nation’s top legislature also gave regional authorities approval to sell 1.18 trillion yuan of new debt to help plug the budget deficit, up from 600 billion yuan last year. Muni issuance climbed to 1 trillion yuan in April, bringing this year’s total to 2.3 trillion yuan. The yield on 10-year sovereign debt has risen six basis points this month to 2.96 percent, the highest since December.

“China’s overall credit growth exceeded the implied official annual target,” UBS economists Zhang Ning and Wang Tao wrote in a May 13 note. Credit hasn’t been really tightened after being adjusted for local governments’ debt swaps, they said.

Ratings Cut

Moody’s Investors Service and S&P Global Ratings cut their rating outlooks for China in March, citing concern about policy makers’ lack of progress in addressing the nation’s debt binge. Billionaire investor George Soros said last month that the nation’s credit-fueled economy resembles the U.S. at the onset of the global financial crisis.

Soured loans at Chinese commercial banks rose to an 11-year high of 1.39 trillion yuan in March, data from the banking regulator showed last week. Including “special-mention” loans, those where future repayment is at risk but that are yet to become nonperforming, the amount swelled to 4.6 trillion yuan. representing almost 6 percent of total advances.

China should put deleveraging ahead of short-term growth and drop the “fantasy” of stimulating the economy through monetary easing, the People’s Daily cited an unnamed “authoritative person” as saying last week.

“To achieve sustainable long-term growth, the government must address the existing debt effectively, especially those of inefficient parts of the economy," said Xia Le, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. "If it needs to be written off, it has to be. This would be the pain it has to go through.”

— With assistance by Justina Lee, and Helen Sun

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