China’s Local Governments Rush to Refinance Hidden Debt, Tightening Liquidity
China’s Local Governments Issue Huge Amount of Bonds to Refinance Off-Balance Sheet Debt
China’s local governments are rushing to issue bonds to refinance hidden debt, further tightening liquidity in the financial system. According to data compiled by Bloomberg, regional authorities are set to sell 1.7 trillion yuan (S$313 billion) of bonds in the first two months of 2025, an unprecedented amount for the period.
Hidden Debt Refinancing
About half of the issuance, or 850 billion yuan, is to replace off-balance sheet debt, according to the data. This is a significant portion, as it indicates that local governments are shifting their focus from short-term to long-term financing.
Cash Squeeze
The unusually big offering has exacerbated a cash squeeze this year, as banks rush to absorb the securities. Money-market rates have surged recently as the People’s Bank of China refrained from monetary easing and kept liquidity conditions tight, in an effort to support the yuan.
Debt-Swap Plan
The refinancing push comes after China approved a plan in late 2024 to allow regional authorities to swap six trillion yuan worth of hidden debt – mostly held by local government financing vehicles – over a three-year period. This would help regional authorities reduce interest payments.
Swap Bonds
Local authorities may have seized the window ahead of the National People’s Congress in early March to offer a large amount of "swap bonds", said Yuan Haixia, executive director of the research institute at China Chengxin International Credit Rating. With most of the local bonds held by banks, they’re facing bigger challenges managing liquidity, she added.
Government Bond Supply
Government bond supply is expected to increase to the year following China’s pledge of greater fiscal support. Vice-finance Minister Liao Min said at a January briefing that the 2025 deficit-to-GDP ratio will rise.
Implications for Banks and Markets
How the banks secure funding amid higher costs and purchase the newly-issued bonds will have implications across China’s money and bond markets. The seven-day interbank repo rate rose above a broader market gauge in a few sessions this month – an anomaly as it’s usually cheaper for lenders to borrow funds from each other.
Central Bank’s Monetary Policy
The central bank has been draining funds in most daily operations this year, widening the gap between the benchmark money market rate and the policy rate to the most in four years. While the People’s Bank of China ramped up cash injections on Friday (Feb 21), it did little to ease the market crunch.
Debt-Swap Issuance
Among the local governments’ debt-swap bond issuance this year, more than 60 per cent were 20- and 30-year notes, Bloomberg-compiled data show. This indicates authorities have taken advantage of still-low yields to secure long-term financing.
Conclusion
The rush to refinance hidden debt by China’s local governments has significant implications for the country’s financial system, particularly for banks and the bond market. The increased demand for funding and the decrease in liquidity will lead to a cash squeeze, making it challenging for banks to secure funding at reasonable costs. As the central bank continues to keep liquidity conditions tight, the market is likely to remain volatile.
FAQs
Q: What is the purpose of China’s local governments issuing bonds?
A: To refinance hidden debt, particularly off-balance sheet debt.
Q: How much is China’s local governments planning to issue in bonds in the first two months of 2025?
A: 1.7 trillion yuan (S$313 billion).
Q: What is the purpose of China’s debt-swap plan?
A: To allow regional authorities to swap six trillion yuan worth of hidden debt over a three-year period, reducing interest payments.
Q: What are the implications for banks and the bond market?
A: The increased demand for funding and the decrease in liquidity will lead to a cash squeeze, making it challenging for banks to secure funding at reasonable costs.
