The Chinese province of Jiangsu completed a landmark bond sale on Monday that marks the start of a massive local government debt bailout that some have described as quantitative easing with “Chinese characteristics”.
On Monday Jiangsu sold Rmb52.2bn with a coupon rate only slightly higher than equivalent sovereign Treasury rates, after the central bank capped the premium local governments could offer.
The plan is aimed at reducing the interest burden for debt-laden local governments, which have all borrowed heavily in recent years to pay for the enormous government construction boom unleashed to prop up the economy following the 2008 global financial crisis.
The Jiangsu government estimated that Monday’s bond sale would reduce its interest burden by
The three, five, seven and 10-year bonds are sold at rates ranging from 2.94 per cent to 3.41 per cent, only slightly higher than China’s Treasury bond rates, which ranged from 2.77 per cent to 3.39 per cent for 10-year notes on Monday.
Not even Beijing seems to know the true scale of local government borrowing in recent years since much of the debt was taken on by off-balance sheet “local government financing vehicles” that allowed provincial authorities to skirt rules banning them from running deficits.
In mid-2013 Beijing estimated that local governments had direct and indirect liabilities of nearly Rmb18tn, but they have continued to borrow heavily since then and some analysts believe the actual amount could be more than double that.
Jiangsu is one of China’s richest and best-managed provinces, but its initial plan in late April to sell Rmb64.8bn of bonds to pay off existing debt failed because state-owned banks balked at an interest rate that was considered too low for the risk involved in lending to the province.
After initially saying the Rmb1tn bond programme would be driven by the market, Beijing changed its mind and issued an administrative order to banks to buy the bonds.
The central government also capped the interest rate that could be offered at no more than 30 per cent above Treasury yields, allowed banks to use the new bonds as collateral from the central bank and lowered benchmark interest rates to make the bonds more attractive.
Despite the similarity to unconventional monetary policies that have become common in crisis-hit western economies in recent years, the central bank has insisted that the Rmb1tn bond programme does not amount to quantitative easing because the central bank is not buying the bonds directly.
The central government has ordered 36 regional and city governments across China to complete a combined Rmb1tn in bond sales by August 31 and has also said that 70-80 per cent of them will be bought by state banks in state-directed private placements.
The far northwestern province of Xinjiang will be next, with its own Rmb5.9bn bond sale on Thursday.