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China Officially Doubles Down On Multi-Trillion Yuan Debt Swap Program

Tyler Durden's picture




 

Last week, in “China May Double Down On Debt Swap As ABS Issuance Stumbles,” we discussed the likelihood that China’s local government debt swap pilot program would be expanded in the very near future. To recap, here’s what you need to know about the refi effort:

China’s local governments are sitting on a pile of debt that amounts to around 35% of GDP. That’s a problem because some of this debt was accumulated off balance sheet through LGFVs (an effort to skirt official restrictions on borrowing via shadow banking conduits) meaning in some cases yields are far higher (at roughly 7%) than they would have been otherwise. The idea is to swap this debt for muni bonds and save 300 or so bps, in what amounts to a giant refi effort. The program officially got off the ground midway through last month with Jiangsu province sold paper with maturities ranging from 3 to 10 years at yields between 2.94% and 3.41%. 

 


The program is a big deal for two reasons: 1) China’s local governments simply cannot afford 7% coupons on CNY20 trillion in debt, and 2) thanks to the fact that the PBoC will accept the muni bonds as collateral for cash loans, each new muni issue translates to new credit creation in the real economy — or at least that’s the idea. Shortly after launching the program, Beijing eased restrictions on LGFV financing, meaning that suddenly, local governments were once again able to borrow through the very same vehicles which got them into trouble in the first place. In the end, local governments are essentially able to roll their legacy high-yield LGFV debt via the issuance of muni bonds while re-leveraging via more LGVF financing. Meanwhile, the banks who purchase the newly issued munis pledge them for PBoC cash which is then used to make standard loans to individuals and businesses.

If this sounds convoluted and self-defeating, that’s because it is. It’s a prime example of China attempting to deleverage and re-leverage at the same time. Local governments get to reduce their debt service burden (deleveraging) but the very mechanism which makes that possible also leads to further credit creation (re-leveraging). 

Because the total debt burden for China’s local government stands at around 35% of GDP, the debt swap program can theoretically be expanded from the initial CNY1 trillion to as much as CNY20 trillion and indeed, we now have confirmation that the quota on the pilot program has been doubled. WSJ has more

China will let its cities and provinces issue another 1 trillion yuan ($161 billion) of bonds as it continues an effort to rev up the economy and help local governments refinance their hefty debt burdens.

 

The move, which doubles the amount Beijing initially authorized, will help local governments refinance 1.86 trillion yuan in debt due this year, according to the official Xinhua News Agency. It said swapping 1 trillion yuan will save local governments about 50 billion yuan in annual interest payments.

 

The move, which was expected, underscores Beijing’s continued worries about slowing economic growth and mounting debt. China’s 7% first-quarter year-over-year growth rate was the slowest in six years, and recent trade and inflation data continue to point to soft domestic demand.

 

China’s local governments had run up 17.9 trillion yuan of debt as of mid-2013, or $2.89 trillion at current exchange rates, according to the most recent official data. That was up sharply from negligible levels six years earlier.

 

Much of the debt was from a massive stimulus push in the wake of the 2008 financial crisis. In recent years, China’s local governments circumvented rules that bar them from borrowing to fund the infrastructure and housing projects that have been essential in maintaining fast economic growth. The debt-fueled investment boom shielded China from the global financial crisis but left the country with greater financial vulnerabilities.

 

Last month, China’s eastern province of Jiangsu became the first of several provinces to auction bonds. After a brief delay, it sold 52.2 billion yuan of debt at interest rates that ranged from 2.94% for three-year debt to 3.41% for 10-year bonds.

 

Other local governments that have followed suit include the provinces of Hebei, Shandong, Hubei, Guangxi, and the municipalities of Chongqing and Tianjin.

While the program is unequivocally positive for local governments as it effectively allows provincial authorities to kick the can a little further down the road while retaining access to LGFV financing in the mean time, it's not clear whether the PBoC's move to allow banks to pledge the new bonds for cash loans will be effective in terms of boosting credit creation and lowering real rates. 

If three benchmark rate cuts in seven months and two RRR cuts since the beginning of the year haven't done the trick, it's unclear how pumping more liquidity into the system via LTROs is going to effect a meaningful change, especially considering the fact that rising defaults and NPLs are making banks think twice about taking on more credit risk. 

 

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Wed, 06/10/2015 - 21:05 | 6184760 Its Only Rock N Roll
Its Only Rock N Roll's picture

Kicking the proverbial can down the empty highway to the ghost city

Wed, 06/10/2015 - 21:18 | 6184801 remain calm
remain calm's picture

China knows they ae kicking the shit can down the road and they know its all going to explode. They kinda of in a perverted way, welcome that day. The day the of the worlds biggest financial crisis occurs, this just alllows them to pivot to their gold back currency. They have been preparing for that day for almost a decade.

Wed, 06/10/2015 - 21:59 | 6184938 Oldwood
Oldwood's picture

Exactly how big of a financial threat would I need to become before I could get on this gravy train??

Thu, 06/11/2015 - 13:04 | 6186843 asteroids
asteroids's picture

Fucking stupid. Just another ruling class trying to figure out how to rip off the current generation and passing the bill to following generations. It's stupid, sinful, and immoral.

Wed, 06/10/2015 - 23:32 | 6185226 The Rolling Thunder
The Rolling Thunder's picture

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Wed, 06/10/2015 - 21:22 | 6184821 g3h
g3h's picture

Nothing new.

Wed, 06/10/2015 - 21:25 | 6184831 Soul Glow
Soul Glow's picture

PRINT BABY, PRINT!

Wed, 06/10/2015 - 21:51 | 6184915 Kirk2NCC1701
Kirk2NCC1701's picture

Disco Inferno!

Wed, 06/10/2015 - 21:43 | 6184885 NoDebt
NoDebt's picture

"2) thanks to the fact that the PBoC will accept the muni bonds as collateral for cash loans, each new muni issue translates to new credit creation in the real economy — or at least that’s the idea."

I want you to let that sink in for a moment.  That's right.... read every word slowly.... understand what they are saying.... begin realizing the full horror.... that's it... very good.

The more local/minicipal governments borrow (spend), the more money they get from The State.  The locals run up the credit card, The State pays the bill.

I just hope I live long enough to see the day that everyone looks back on this time in history and wonders what the fuck the whole world was thinking.

 

Wed, 06/10/2015 - 22:32 | 6185053 tarabel
tarabel's picture

 

 

Trenchant observation.

I wish I could live to see the day when everybody came to their senses and put a stop to this madness, but I'm not Methuselah.

Thu, 06/11/2015 - 01:18 | 6185416 deja
deja's picture

At this point, why not?  Like every good house of cards it's only time before it all goes crashing down.  Getting the most out of it before the reset, because no one's paying this shit back.  The chinese will then run all the way to the (gold) bank and will be less worse off than anyone else.

Wed, 06/10/2015 - 22:38 | 6185066 tarabel
tarabel's picture

 

 

I'm afraid I don't see any hint of deleveraging in the program.

Refinancing to a lower rate so you can borrow more and make the same (already out-of-control) fixed number of yuan in payments is not deleveraging in any meaningful way.

Even if you refi and don't borrow any more, it's still not deleveraging.

Unless, maybe, you take the savings on the payments and double up on retiring principal.

Like any government anywhere is going to do that.

So, yeah, these guys are working 24/7 to catch up to the crumbling financial structure of the West and doing one hell of a job, I must say.

Wed, 06/10/2015 - 23:08 | 6185167 q99x2
q99x2's picture

Once the graph goes vertical it will always look the same. Or you could keep shrinking the Y axis to show something. What does it show now.

Thu, 06/11/2015 - 01:42 | 6185450 scatha
scatha's picture

For those who still believe that China is ruled by communists that should be wake up call.

For last at least two decades China behaves of fascist state in every meaning of the word. Working people and any organizations that would truly protect health or any interests of workers are being destroyed. They benefit nothing from the whole western instigated and financed, by robbing western middle class, economic boom of China.

Before Chinese worker was making a dollar a month and paid one cent for bread. Now Chinese worker was making 100 dollars a month and pay one dollar for bread calling that improvement.

Remaining true communists are killed, in prisons or gagged. What we have is fascist state of fused state and private profit/public loss corporations and government via rampant cronyism with intimate ties to the western elites, themselves cultivating fascism, global fascism.

China is distinct part but nevertheless, a part of global political system run by world elites through central banking, united in quest form debauchery, gluttony, and psychotic drive to ultimate extermination of ordinary people.

The multiple decisions of China to follow western prescription only to maintain illusion of functioning world economy with ghost cities, millions un-bought cars hidden from view, fake exports to HK, collapse of energy demand and general consumption, ecological catastrophe and wide spread of poverty in China and elsewhere are clear evidences of harmony at top echelons of global elite, despite often personality conflicts misconstrued as political antagonisms.

Now China’s central bank, PBOC, after imposing politically motivated stimulus spending, to enable recent transition of power between two political mafias, embarked on a version of massive QE on the way to ZIRP to keep badly collapsed or deteriorated “good things” going joining US, Europe and Japan on the road to collapse of society.

China’s AIIB is clear example of China’s entering a path following the US imperial path after WWI and WWII to grow sagging economy by exploiting the world (global investment strategy and dedolarization) , in attempt to bring stability to their society that no longer can be exploited with satisfactory ROI without serious political consequences. 

In other words, these are evidences that China began to depart from their Confucian historical perspective toward short-term political game. The greed of China’s ruling elites is sowing their demise as much as American ruling elite.

They have a way to go but within next 25 years or less China’s about 200 millions strong middle class is likely to join the rest of the western world middle classes in common global extermination camp.

 

ZH crowd and others wonder how long it will last before this illusion implodes since it cannot continue forever. They are waiting for spectacular and quick blast and immediate ruins of the system. I say look around, it is happening now. It is explosion in slow motion that hits weak and vulnerable first and then proceeds to the strong and resilient. We have to open our wide-shut eyes to see. The world is not gonna burn. It is burning.

Thu, 06/11/2015 - 04:53 | 6185594 the_narrator
the_narrator's picture

You guys don't understand.  The Chinese government prints its own money.  When the government buys all these bonds taxpayers do not have tp pay it back with interest.  It's a totally different system than we've got here in the states.

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