China surrenders to foreign investors and begins to finance itself overseas
The Chinese economy has entered a phase that all countries in the world have already gone through because of the pandemic. Borrowing becomes an affordable means to increase public spending, but the moment of truth comes when debt financing is faced. The pressure at this stage has led Chinese municipalities to seek support from foreign investors and markets for the first time in history.
There is already a Chinese bond market for foreign investors, with a small size of half a trillion dollars. The novelty is that municipalities will have to go to this financial forum to renew their indebtedness. This is the case of the city of Shenzhen, which will issue securities for 770 million dollars, or that of the province of Guangdong, which is also considering a placement of securities on the Macao market.
Chinese cities and provinces placed 1.9 billion yuan (about $293 billion) worth of refinancing bonds in the first half of this year, according to the Bloomberg financial agency. The figure was up 700 billion yuan (about $110 billion) from the first half of last year.
"The amount of outstanding debt will continue to grow, so the scale of refinancing is unlikely to go down," said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc in Hong Kong quoted by digital newspaper ZeroHedge. "Local governments have slowed the pace of sales of special bonds used to finance infrastructure spending such as roads and housing, partly due to a lack of quality projects and Beijing's increased focus on debt control," ZeroHedge asserts.
Beijing's effort to control debt is evident. "Chinese regulators continue to address the country's ongoing problems with local government debt. In a new notice, the China Banking and Insurance Regulatory Commission (CBIRC) and the Ministry of Finance recently emphasised that banking and insurance institutions should not raise hidden local government debts. This means that local government investment companies will have to reduce existing debts, which will make it impossible for them to find liquidity easily". This was the clear statement made by the Beijing authorities before the summer, according to The Diplomat, a newspaper that has specialised in the Asia-Pacific region for the past twenty years.
ZeroHedge warns that the sharp slowdown in China's economic growth will make fiscal stimulus inevitable and ultimately lead to the issuance of many more bonds. The possibility of higher fiscal spending in the second half of the year had already been taken for granted by a number of economists close to the Beijing government just a few weeks ago, in a statement published by the China Securities Journal, a Chinese state-run media outlet.
