Chinese Debt Sold Globally

Bloomberg: China's Local Debt Problem Goes Global

Debt from special-purpose vehicles linked to municipal and provincial governments -- leverage that central authorities are trying (unsuccessfully) to extinguish -- is becoming more common in overseas markets.

What's worse, lately it's been the weakest cities and provinces panhandling to international investors.Since June, as many as six local government financing vehicles have sold dollar bonds, bringing the total issued by such entities to at least $4 billion this year, just shy of the record $4.1 billion logged in all of 2015. Three offerings were scored below investment grade by Fitch, whereas prior to 2016, only one junk security of its kind had surfaced internationally.

How would the market price Detroit municipal government bonds issued in Swiss francs?

PBoC: Monetary Policy Unchanged; CBRC: Lend to Private Borrowers

Bloomberg: China Central Bank Reassures on Policy After Credit Slows

The deceleration in the growth of new yuan loans in April was mainly due to a pick-up in a program to swap high-cost local government debt for cheaper municipal bonds, the People’s Bank of China said in a statement on its website on Saturday. No less than 350 billion yuan ($53.6 billion) of such swaps were conducted last month, while aggregating financing growth was affected partly by a decrease in corporate bond issuance, according to the central bank.

The Chinese statement also notes slower corporate borrowing and a rise in defaults: 央行：稳健货币政策取向并没有改变

The month-on-month drop in TSF, in addition the impact of loan changes, was also affected by a decline in corporate bond financing. April corporate bond net financing 209.6 billion yuan, 509.4 billion yuan less than the previous month, which was mainly affected by the recent increase in bond market defaults, corporate bonds delayed effect, but still more than 48 billion yuan more than last year. It is worth noting that the current scale of social financing statistics do not include local government bonds. From our situation, the local government through the issuance of bonds to obtain financing is also largely used to support the real economy. If local government bonds plus April net financing 1.06 trillion yuan, the scale of social financing will reach 1.82 trillion yuan, up 757.4 billion yuan. After Thus, taking into account seasonal changes and local government bond issuance, debt replacement and other factors, on the whole of the current financial support to the real economy is still strong.

Reuters: China orders banks to clear hurdles slowing private sector lending

According to the document seen by Reuters, the China Banking Regulatory Commission (CBRC) is requiring financial institutions to conduct checks on their implementation of central government directives intended to make it easier for private firms to access bank credit.

It also tells them to work to resolve any problems in cases where lending support to private enterprise is insufficient, including small and micro-businesses.

...The document also called for banks to reduce costs for short-term credit products such as bridge loans, which private firms rely on to stay afloat through tough business cycles, while examining risk in their loan guarantee businesses.

Note this has been a multi-year demand by the central government, which has yet to be fulfilled. See: Li Keqiang Losing War on Financing Costs; 70% of SMEs Have Seen Financing Costs Rise in 2015

Bond Swaps Accelerate

People's Daily: Debt-for-bond swap quickened to lower local govts' burden

China has accelerated debt-for-bond swaps for local governments, adding more than 2 trillion yuan ($306.7 billion) since the start of the year, more than half of last year's 3.2 trillion yuan, reported the Economic Information Daily on Friday.

Of the total 2.2 trillion yuan bonds raised by local governments since the start of the year, over 90 percent were debt-for-bond swaps, according to the paper, as China aims to ease financing burden for local governments.

Related: PBOC Says Sharp Drop in Lending Due to Local Government Debt Swaps

In its statement, China’s central bank said that the reduction in lending was a result of multiple factors. The first variable was an increase in local government debt swaps which accounted for roughly 350 billion Yuan. Seasonal factors contributed to the decline in loans as well with members emphasizing that the first quarter typically witnesses heightened lending. In addition, the PBOC is pressuring banks – using asset background quality control - to be more cautious when lending to avoid bad loans. These measures come amid a backdrop where the nation’s debt-to-GDP ratio is now above 240%.

Local Debt Swap Set to Increase 40% in 2016

iFeng: 今年多地置换债规模料同比增约四成 利率或略有提升

According to "Economic reference test News" reporter learned from Shandong Province, Jiangxi, Guangdong, Gansu, Heilongjiang Province, Guangxi Zhuang Autonomous Region and other provinces, Finance Minister at the Ministry of Finance has issued this replacement debt limit, many provinces higher than the amount obtained in debt due this year, the year ahead will be replaced with outstanding debts. More provinces this year plan to issue replacement bonds, growth of about 40 percent over last year, some provinces up as much as 2.4 times the size of the debt exchange last year. In addition, the average interest rate from the current debt situation, debt replacement rate is expected to rise slighly.

More Money For Muni Debt, About That 4 Trillion

In 2008, China launched a 4 trillion yuan stimulus to save the economy. In 2015, China is doing a 4 trillion debt swap to keep the economy from contracting.

Bloomberg: China Bonds Drop as Government Said to Expand Debt-Swap Program

The allocations will be raised to 4 trillion yuan ($628 billion) for this year, pending approval from the State Council, people familiar with the matter said on Wednesday. The program aims to help regional authorities by exchanging high-cost bonds for cheaper municipal debt.

“The biggest negative of the debt swap is the increase in bond supply that could trigger yields to go higher, especially in the mid- to long-end," Guotai Junan Securities Co. analysts led by Xu Hanfei wrote in a note. "We can’t rule out that the central bank will cut interest rates and reserve ratios to provide support."

Local governments are feeling the squeeze.

Municipal bonds threaten banking system

David Goldman looks at municipal debt on bank balance sheets in
The Bank-Insurance-Municipal Daisy Chain (Why the Federal Government Will Bail Out the States)

If municipal debt actually defaulted, the capital position of the banking system would be impacted, bank preferred debt might stop paying, and the holders of bank preferred debt–starting with the insurers–would be in serious trouble.

...Why buy munis? For all of Warren Buffett’s dire warnings about municipal finances, the fact is that the federal government can’t let major municipal debtors (at the level of states, for example) go under without also bringing down the banking system and everything else.

If it goes, it all will go together. That’s why munis ultimately will be bailed out. A Democratic administration whose core constituency is public employee unions will do everything in its power to keep them happy (and a Republican Congress, which we likely will have in 2011, may frustrate this). But ultimately it’s a matter of survival.

Just something to think about when someone says that a few defaults in the muni bond market won't cause any problems.

And don't forget Americas #1 investor also expects a bailout of municipal bonds and sells insurance on munis:

Socionomics—The Fall of Warren Buffett