MNI China Press Digest Dec 21: Local Debt, LPR, Red Sea

Highlights from Chinese press reports on Thursday:

• The government will increase use of refinancing bonds next year to address local government debt risk, according to analysts interviewed by Yicai.com. Given local governments will likely face declining revenue from land transfers next year, authorities will issue CNY2-2.5 trillion special refinancing bonds, according to Wang Qing, chief macro researcher at Golden Credit Rating. Following policymakers' recent commitment to strengthen fiscal policy moderately, Wang expects next years’ fiscal deficit of 3.5% and new local government special bonds to reach CNY4 trillion in 2024, an increase of CNY200 billion from over 2023.
• The benchmark loan prime rates have room to move down next year to further reduce financing costs, but it will require more policy support to help ease the pressure on banks’ net interest margins, said Zhou Maohua, researcher at China Everbright Bank. The People’s Bank of China will likely lower the medium-term lending facility rate in H1 2024 as the U.S. Federal Reserve cuts rates, which will provide the PBOC more easing room and push down LPRs, said Wang Qing, researcher at Golden Credit Rating. LPR remained unchanged for the fourth month on Wednesday, with the one-year maturity at 3.45% and the five-year one at 4.2%.
• Authorities should prepare for stress testing and risk investigation following a sharp increase in freight rates as more shipping firms pause Red Sea journeys over attacks, said Yicai.com in an editorial. If the Far East-Northwest Europe and Far East-Mediterranean routes are forced to detour around the Cape of Good Hope, the shipping distance will increase by 29.1% and 80%, with the sailing time lengthened by 10 and 19 days. ASEAN, the Middle East, Africa, and Europe account for an increasing share of China's exports, alongside a rising proportion of trade financing in yuan. Higher freight will inevitably magnify the risk of RMB trade financing. This has also pushed up international crude oil and natural gas prices, which could lead to a rebound in U.S. and Europe inflation and delay expected rate cuts.