China pins stimulus on money merry-go-round

Breathing room. China’s economy has long been supported by a great wall of debt, much of it hidden off local governments' balance sheets. To reboot economic growth, Beijing plans to swap these borrowings into bonds with full, rather than implicit, state backing. The rejig will juice spending by the provinces for a while.

There is no official number but the International Monetary Fund estimates the total borrowing of local government financing vehicles (LGFVs) at about $9 trillion, or about half of GDP . These dues include a ragbag of shadowy instruments such as enterprise bonds and financing from trusts.

These borrowings accumulated partly because Beijing limited how much provinces could raise through official bonds. Now, the Ministry of Finance is planning a one-time, large-scale expansion in the debt ceiling to formally acknowledge these outstanding liabilities.

The money merry-go-round will improve transparency and give local governments some breathing room. Take Liaoning. The province in China’s northeastern rustbelt was allowed in 2023 to refinance 87 billion yuan ($12.2 billion), with bonds maturing in 7 to 30 years on an average interest rate around 3.5%. Its uptake of the debt swap programme, per Moody's, was equal to 50% of its total debt from LGFVs - one of the biggest buckets of hidden debt - and 111% of the short-term debt from its public LGFV issuers.

Scaling up this swap programme will help other provinces to avoid a short-term liquidity crunch. Banks might be in brighter mood to lend more too, as replacing dubious borrowings with government bonds will most likely allow lenders to slash risk weightings assigned to these assets.

By moving the money from one pocket into another, Beijing will wring out efficiencies for borrowers. That will allow local authorities to increase short-term spending on public housing and incentives to boost consumption. The principal amount of debt governments owe will not reduce. It may even rise. But China will ease a short-term source of financial instability.

Context News

The Ministry of Finance said on Oct. 12 it will expand a swap programme that allows local governments to issue state-backed bonds to replace their shadow banking debts. Finance Minister Lan Foan described the move as Beijing’s “biggest effort” so far to tackle local government’s debt issues.