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China's Latest Spinning Plate: 10 Trillion In Local Government Debt
Over the past week, we’ve noted (twice) that Chinese QE is now practically inevitable. We learned recently that corporations’ FX deposits rose by some $45 billion in January which, remarkably, represents nearly half of the entire increase logged in 2014. This points to capital flight, as both companies and individuals are increasingly reluctant to hold the yuan in the face of slowing economic growth and the growing perception that devaluation is imminent. We also pointed out that despite the PBoC’s alleged interventions (evidence of which can be found in the data on the change in FI’s position for FX purchases), the yuan is still overvalued on a REER basis, meaning, to quote Barclays, “amid slowing inflation and rising outflows, the costs of limiting CNY weakness are growing – including the unintended effect of placing more stress on CNY market liquidity and interest rates, rendering liquidity easing efforts less effective.” China then, finds itself in a rather precarious position:
Excessive devaluation at a time when corporates are increasingly choosing to hold their export profits in currencies other than the yuan may hasten capital outflows. The irony of course is that failing to act aggressively to arrest REER appreciation risks cutting into those very same profits or, as we put it previously, “devalue too much, and the capital outflows will accelerate, not devalue enough, and the mercantilist economy gets it.”
Ultimately, this led us to conclude that “the flowchart for what is in store for the world for the next 12-24 months [looks like this]: an ongoing deterioration in Chinese economic conditions, coupled with a weaker, but not weak enough, currency, before the PBOC first go to ZIRP, and then engages in outright QE".
Against this backdrop, we got even more evidence today that the Chinese economic slowdown may be accelerating as industrial production, retail sales, and FAI all came in light of expectations prompting us to ask (again), “just how much longer do we have to wait until the inevitable moment when the last marginal central bank joins the global currency war and starts "printing money" on its own, finally pushing the world over to the next escalation level in the "[insert noun] wars" chain?”
To be sure, the Chinese Ministry of Finance isn’t too keen on “groundless” QE rumors and had the following to say overnight on the subject:
- MOF'S ZHU GUANGYAO SAYS TALKS OF CHINA `QE' GROUNDLESS
- CHINA MOF OFFICIAL SAYS NO SUCH THING AS CHINA QE: SEC. JOURNAL
This is where it gets interesting. China is in the midst of attempting to help local governments refinance a mountain of debt, some of which was accumulated off balance sheet via shadow banking conduits at relatively high rates. Here’s more, from The Economist:
To begin with, local governments will be allowed to swap 1 trillion yuan ($160 billion) of their existing high-interest debts for lower-cost bonds. According to the Economic Observer, a credible local newspaper, this may just be the first tranche, with the finance ministry preparing to give local governments a 3 trillion yuan quota for refinancing. It is easy to imagine that such quotas will become a regular feature of China’s fiscal landscape over the next few years. As this chart shows, the combination of new debt issuance plus swaps will help cover what local governments owe this year, but will make only a small debt in their overall liabilities…
China’s local-government debt problem has always been twofold. First, there is the sheer amount of money they owe. That has doubled from less than 20% of GDP in 2007 to nearly 40% today. Second, there is the very peculiar and opaque structure of these liabilities. Because local governments can only borrow with the explicit permission of the finance ministry, which has been miserly in the past, they have been forced to use off-balance-sheet entities to raise funds. Those entities (commonly known as local government financing vehicles, or LGFVs) have borrowed from banks and shadow banks alike. As a result, the size of their debts is unclear, but it is certain that the cost of their debts is much higher than would have been the case had they issued bonds in the first place.
While this raises a number of questions (including whether creditors will be railroaded into participating and thus forced to accept much lower rates of return), the most important thing to note here is that the swaps account for but a small percentage of total local government debt, which the following chart shows:
It seems as though one way to address the issue would be for the PBoC to simply purchase a portion of the local debt pile and we wonder if indeed this will ultimately be the form that QE will take in China. Here’s UBS with more:
Chinese domestic media citing "sources" saying that the authorities are considering a Chinese "QE" with the central bank funding the purchase of RMB 10 trillion in local government debt. In fact, the "sources" seem to be some brokerage research reports speculating ways of addressing the stock of local government debt, following the MOF announcement that local governments have been given a RMB 1 trillion quota to issue bonds to replace other forms of local debt.
The current central bank law in China prohibits direct monetization of government deficit. As we have written in "China unveils local government debt solutions" last October following the government's announcement, China is likely to swap existing debt stock with bonds that have longer maturity and lower yields. Further, we wrote that such replacement bonds could mount to RMB 1 trillion, which is in line with MOF announcement over the past weekend. In addition, we think the government will consider allowing private placement of local bonds or similar means to directly swap bank loans into local government bonds (without changing debtor or creditor), which would allow for much larger debt restructuring, helping to lower local government debt service payment, and at the same time improve banks' liquidity and capital position.
It looks as though our prediction of outright debt monetization in China may be proven correct sooner than even we thought thanks to the trillions in loans the Chinese shadow banking complex has made to the country’s local governments who desperately need some manner of relief lest the 500bps over treasurys they’re paying should end up swallowing them all whole. We also wonder what’s next for Chinese stocks in the event “real” QE is introduced given that QE-lite (PSL) resulted in the following:
* * *
We’ll leave you with what we said last week regarding the QE end game:
And once China, that final quasi-Western nation, proceeds to engage in outright monetization of its debt, then and only then will the terminal phase of the global currency wars start: a phase which will, because global economic growth and that all important lifeblood of a globalized economy - trade - at that point will be zero if not negative, will see an unprecedented crescendo of money printing by absolutely everyone, before coordinated devaluations mutate into uncoordinated, and when central bank actions morph from "all for one" to "each man for himself."
At that moment, what had been merely currency "war" will finally transform into a shooting one.
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Spectacular posts this evening Tylers
Agree. They got a burst of energy here tonight. Hope it carries through for a while.
me glad 2.
spinning plates, good one !
So instead of helping to monetize US debt they're monetizing their own... nothing to see here...
A little QE there, a little QE here...pretty soon a little QE everywhere. Its seems to be all the rage, why not get with the hip crowd?
The Student is now the Master.
China can create a new institution every 10 years or 4 years or whatever to soak up Debt in a Shell Organization. Enron of course provided the Precedent. Jon Corzine filled in some blanks. Mr. Ponzi pioneered the Technology.
fire monkey ridin' a tiger, maybe not so good?
I used to call my middle finger my fire monkey. I'm not exactly sure of your context, but I think it works as a metaphor.
And this is the country that's going to take over the world economically and unseat the US from its status as the only world superpower "within a few years".
My ass.
All they know how to do is copy and lie. Don't get me wrong, that's how I made it though college, but it's not how you become the world's economic leader.
+1
And then add to the fact, many people here think that Russia is going to be saved by the Chinese. The China man has alot more to worry about than Putin's problems...fuck maybe the only thing worth a damn on china's balance sheet is UST....but most people here think UST is worthless, so what is the value of the above??????
This game is going to be who can kick the can down the road the longest....Right now show me, who else can kick it longer than the Yanks?
What's taking the Chinese so long? Every other country is running the printing presses full time, non-stop. They need to get with it, PRONTO!
Haven't they seen what their neighbors in Japan have done? What marvels of financial engineering they have produced?
Oh, that's right, China is still growing at 7% a year.
I'd make it closer to 3%, if they're growing at all.
Like here in the US, take out inflation and we've been in a recession since 2001.
FFS, nuke NY and DC and let's get on with correcting all this crap. So fucking sick of living in this upside-down world.
They are reading our comments and still trying to hack the FED computer system to see what the 'plan' is.
China has been in a state of pure QE ever since they started promoting reckless guaranteed trillions in RE loans in their country, just a different way of doing the same bullshit we do here.
Will the Fed take the bonds as collateral? :)
Three way pony sex in China lender borrower and payer each betting he can get off on the other before they can get off on him
These stories are starting to lose me already...
I mean the complexity in this one is bizzarre. They sound as clueless as a single-digit kid trying to drive a Mack truck. They're going to kill something.
As I wade through the minutia, I'm asking myself just what the hell do these people think they're going to accomplish with all of the shuffling? Absent a global reset (and really, a lot more than that), how can they expect to drag their asses out of the debt canyon they've created?
Just how do they think they got there in the first place?
The west can't consume...much.
Therefore, they can't produce...much.
End of story.
What do they hope to change about that not of their making (they were the receiving beneficiaries of western outsourcing WE initiated) with all of the additional, mind-numbing complexity?
Folks, if we want to get through this global mess at all, we have to crash first. All of these insipid, expensive, and time-wasting games are just locking us down tighter, without any real solution.
Sooner or later, ordinary folks are going to have to shut this crap down all over the world.
It's not working.
Take the keys away from these monetary lunatics before we go supernova.
m
it's not that bizzare, they are just trying to restructure the debt(local govt debt)
from my reading, the swapping of higher-cost short-term debt(LGFV) for lower-cost long-term "muni bonds", will lighten the debt servicing costs of local governments, and stretch out the payback time so the money can actually be paid back(eg. can't pay back 1mil in 2 yrs at 5% interest? then pay back 1 mil in 5 yrs at 2% interest, or whatever).
this could be a workable salvage if the debt in question has reached unservicable levels for the debtor(because they are just too broke) and the creditor is staring at a total loss(because the debtor is just too broke)
why not just go to default and have the central government bail out the local governments? who knows, maybe they are actually trying to reform and restructure their financing models for real, muni-bonds did not exist in China and this looks like an introduction program to offer muni-bonds as a funding option for local governments in the future.
I did a little digging, this change had been planned since last year, check page 7 of this English summary of the 2014 Chinese Plenum policy minutes from Brunswick Group
http://www.brunswickgroup.com/media/268332/Chinas-Annual-Political-Gathering-2014.pdf
I don't know how that actually proves "PBoC is going for outright debt monetization" when the very words this Tyler is quoting(section from UBS, the boring minutae after the bold stuff) is essentially describing a debt restructure in working detail, and this actually seems to be a pre-planned policy from 2014.
expect there will be more detailed news out of China after their 2015 plenum(happening right now) wraps up after Mar15.
Certainly hope it wont go as far as war!!!.... Old bitter men brainwashing and exploiting the young...!
What happens to the liquidity when this happens? More empty Chinese cities, more factories producing stuff no one can afford, or does it all carry into Western assets?
China's biggest shipyard goes under
Once China's largest shipbuilder, Rongsheng is on the verge of bankruptcy.
Orders have dried up and banks are refusing credit. Questions have been raised about the shipyard's business practices, including allegations of padded order books. And Rongsheng is apparently behind on repaying some of the 20.4 billion yuan (US$3,.2 billion) in combined debt owed to 14 banks, three trusts and three leasing firms, sources told Caixin.
http://english.caixin.com/2015-03-11/100790192.html
The banks,if in China will get repayed, the trusts will get a 'haircut' and may be reduced to a 2% yield snd the leasing firms will bear the wrath. It is all defined by Frank-Dodd in the general principles.
Right out of the US FED and BOJ playbook.