Is China's New Muni Transparency A Public-to-Private Risk Transfer Trap?
For the first time since 1949, when the Communist Party took power, China will open the regional authority debt markets (muni markets) to the public. According to a Bloomberg report this evening, in a an effort to restructure the 10.7tn Yuan ($1.7tn) local government debt markets, they will be required to publish annual reports and will stipulate clearer obligations than the existing frameworks currently rely on. Much is being made of the fact that this first issuance - for Shanghai no less - enabled it to dramatically cut its interest expense - as investors were clearly comforted by the documentation. However, we worry that that this will cause a multi-tier market to evolve very rapidly between the haves and have-nots as we suspect the more than 6000 companies set up by local governments will bifurcate just as the Chinese IPO market did in the US.
Trust is key and these bonds will assuredly meet with demand - given their implicit guarantees from central government (and currency exposure and yield pick up) - but it is realistically a way to start enabling the huge stimulus that was 'lent' to be rolled on from public to private markets. Color us skeptical but when we read the Wall Street Journal's story on Wenzhou's Annus Horribilis this evening, even vibrant thriving (over-stretched and over-levered) city-states are feeling the recoupling pain of a European recession, US residential construction depression, and European bank deleveraging impacting credit conditions in Asia.
“This is going to really improve the transparency in this part of the market,” said Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong.
“They are investments of safety and good value," Chen Qiwei, a senior bond trader at Shenzhen Development Bank Co. in Shanghai said. "Because the central government is still making the payments on behalf of the local authorities, there won’t be any default risk.”
Yields on their debt started to rise in the past year as Standard & Poor’s estimated that as much as 30 percent of lending to the government entities may go sour.
Entities set up by local governments owed 10.7 trillion yuan at the end of last year, 42 percent of which was in 2011 and 2012, according to a June report by the National Audit Office. Forty-four percent of the debt was from city-level governments, the report said, and 30 percent from provinces.
Shanghai’s sale “is a breakthrough in the local governments’ financing system,” said Wang Jianhui, an analyst in Beijing at Southwest Securities Co. “It doesn’t ease concern over defaults at certain cities loaded with debt but it certainly does promote transparency.”
WSJ: Wenzhou's 'Annus Horribilis' Shakes China (annotated)
“Wenzhou—the birthplace of China's private sector, where entrepreneurs have splurged on Bentleys and helicopters—is cracking...
the trust-based financing networks that took the place of banks in Wenzhou and fueled its binge are collapsing in the face of slowing exports, a trend made worse by Europe's economic woes. Property prices are down. Captains of local industry have fled from debts, sometimes escaping loan sharks by taking their own lives, local authorities say...
Its stumbling local economy has much of China fretting whether trouble for Wenzhou's famously nimble manufacturers heralds broader danger…"In Wenzhou, you see the temperature of China," says Geng Xiao, director of research at Fung Global Institute, a Hong Kong think tank. "This is the capital city of China's private enterprises."
Anxiety is mounting that Wenzhou's troubles are a bad omen beyond the hills that ring it. Ruthless price competition from factories in places like Wenzhou helped China become the No. 1 merchandise-exporting nation...
Wenzhou wealth capitalized a nonbank financing system where relationships matter more than collateral. Traditionally a system for channeling friends-and-family money, the shadow financial system has ballooned. IHS Global Insight analysts estimate Wenzhounese control capital of 800 billion yuan (about $157 billion), or 2% of China's 2010 gross domestic product...
Huang Weijian repeatedly cites "panic" to describe how in recent months his fellow Wenzhou moneylenders decided cash was safest in their own pockets.
The bottom-line is more openness is better, more transparency is better, and meeting the demands of yield hungry money managers is reasonable but we hope they go in with eyes wide open as we suspect this move is much more about risk transfer from the public central planner's balance sheet and on to the private capital markets of the world.