China: MMT moment. The government tells banks to renew and lower the interest on local government debt
China has directed state banks to roll over local government debt with longer-term loans at lower interest rates, according to people familiar with the matter, as part of Beijing's efforts to reduce debt risks in a economy in crisis.
According to economists, indebted local authorities represent a major risk for the world's second largest economy and its financial stability, due to the worsening of the real estate crisis, years of excessive investment in infrastructure and enormous expenditure to contain the COVID-19 pandemic. 19.
Local government debt reached 92 trillion yuan ($12.58 trillion), accounting for 76% of the country's GDP in 2022, up from 62.2% in 2019.
Some of this debt is issued by local government financing vehicles (LGFVs), which cities use to raise money for infrastructure projects, often at the request of central government when it needs to stimulate economic growth, but which are officially separate from local governments. premises themselves. Empty coffers could make it more difficult for Beijing to jump-start a struggling economic recovery, so we need to find a way to get the debt machine moving again.
According to sources, the People's Bank of China (PBOC) last week ordered major state-run lenders to extend terms, adjust repayment plans and reduce interest rates on outstanding loans to LGFVs.
Loans maturing in 2024 or earlier will be classified as "normal" rather than bad loans, and this will not affect banks' performance ratings, one of the sources said. Reuters reports for the first time these measures for banks aimed at defusing local debt risks.
The sources did not specify the extent of the debt restructuring.
To ensure that banks do not suffer heavy losses from debt restructuring, interest rates on renewed loans should not be lower than Chinese Treasury bond rates, a source said, adding that loan terms should not exceed 10 years . China's benchmark 10-year government bond currently yields around 2.7%, while the benchmark one-year lending rate is 3.45%.
The two sources declined to be identified because the policies were confidential.
“Loan costs of LGFVs are usually 4%, and in some regions and cases the costs could be even higher, 5% to 8%,” said one banker, who declined to be identified because he was not authorized to speak to the media.
“A large-scale extension of lending and a reduction in interest rates will deal a serious blow to banks' operations,” he added.
Despite growing local fiscal disarray, China's central government has taken a cautious stance in resolving debt problems to avoid moral hazard risks: Investors may be encouraged to take even greater risks if they think Beijing will always come to the rescue of local governments or state-owned companies.
China's worsening property crisis has increased pressure on municipalities, with developers unable to buy more land, traditionally a key source of local revenue. Since the sector's debt crisis hit in mid-2021, companies accounting for 40% of home sales in China have defaulted, most of them private developers.
The People's Bank of China (PBOC) and the National Financial Regulatory Administration did not immediately respond to Reuters' request for comment.
China's Politburo, the ruling Communist Party's top decision-making body, said in late July that it would announce a basket of measures to reduce local government debt risks, but no detailed plan has yet been officially revealed.
Phasing out total local government debt over 20 years would require annual payments of 6.5 trillion yuan, analysts at ANZ Research said in a note last week. This is higher than China's nominal annual GDP growth estimated for the next decade.
The central bank said it will prioritize resolving debt risks in 12 regions identified as "high risk", including Tianjin city, Guizhou province and Guangxi province, focusing on open market bonds and non-standard debt products maturing this year and next year.
Banks are encouraged to issue new loans to LGFVs to repay bonds and non-standard debt.
Furthermore, Chinese investors are rushing to buy LGFV bonds, even those of the riskiest issuers, as Beijing's attempts to reduce local debt risks encourage them to bet on an implicit government guarantee.
In short, the Chinese debt crisis will end in a huge, huge, MMT moment, in which debt turns into money.
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The article China: MMT moment. The government tells banks to renew and lower interest on local government debt comes from Economic Scenarios .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/cina-momento-mmt-il-governo-indica-alle-banche-di-rinnovale-e-abbassare-gli-interessi-al-debito-delle-amministrazioni-locali/ on Tue, 17 Oct 2023 13:34:39 +0000.