A surge in China’s local-government debt pile is drawing focus to the central bank’s role in avoiding a credit crunch as policymakers seek to develop a municipal-bond market.
Provincial authorities estimated they had 16 trillion yuan (US$2.58 trillion) in liabilities in a review earlier this year, the China News Service said on Saturday last week, citing a Chinese Ministry of Finance official — a 47 percent jump from June 2013.
With liquidity in the bond market restrained by capital flowing out of China, a slowing economy and a booming stock market, the challenge for officials will be to ensure demand as they restructure local finances.
Photo: Reuters
The central bank is considering the expansion of its Pledged Supplementary Lending (PSL) program in part to encourage banks to buy local government bonds, according to people familiar with the matter.
One of China’s new tools to boost liquidity, the PSL last year was used to channel credit to shantytown redevelopment.
Other options for People’s Bank of China Governor Zhou Xiaochuan (周小川) include broad monetary easing and direct purchases of municipal bonds in the secondary market.
“Zhou Xiaochuan has always been a key figure promoting China’s municipal bond market,” said An Guojun (安國俊), an associate professor at the Institute of Finance and Banking at the Chinese Academy of Social Sciences in Beijing. “The central bank has many roles to play in aspects of market infrastructure.”
An expansion of the PSL program would also help improve dilapidated housing and fund the “One Belt, One Road” initiative to invest in regional Asian infrastructure, said the people familiar with the matter, asking not to be named as the talks were private. Banks might be allowed to use more assets as collateral for PSL, including local-government bonds, they said.
Local governments are planning to sell more than 1.7 trillion yuan in municipal bonds this year, up from 400 billion yuan last year.
Chinese Premier Li Keqiang’s (李克強) government has turned to fostering a transparent municipal debt market as a more stable structure for provinces and cities than the off-balance sheet vehicles they expanded during a record credit boom from 2008.
The People’s Bank of China (PBOC) is discussing the adoption of unconventional policies including making direct purchases of local government bonds from the market, Market News International reported on Monday, citing unidentified people.
Previous reports from the Wall Street Journal and Bloomberg News indicated officials were considering letting banks use the notes as collateral for loans from the central bank.
The PBOC and the Ministry of Finance did not reply to faxes sent on Monday seeking comment on plans to support the municipal bond market or upcoming sales.
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