MNI EXCLUSIVE: China To Increase Refinanced Bonds, Debt Swaps

China will control the growth in new debt and allow local governments to refinance more maturing bonds at lower interest rates and for longer periods as well as swap some implicit debt, gaining time to address the mounting financial risk, advisors and an analyst told MNI.

Beijing has already used the opportunity afforded by the recovery to lower the budget deficit to about 3.2% of GDP from 3.6% in 2020, trimmed local government special bond quotas by CNY100 billion to CNY3.65 trillion and skipped a repeat of last year's issue of special Treasury bonds.

Although overall debt levels are manageable, available fiscal funds have only seen a minor increase while the amount of additional fiscal supporting tools has fallen by CNY1.29 trillion, according to Yang Xiaoyi, researcher at BRI Data, an investment advisory firm to local governments. At the same time, maturing debt and interest payments of local governments have risen to CNY2.66 trillion this year from CNY2 trillion in 2020, Yang said.

Meanwhile, December's annual Central Economic Work Conference for the first time urged local governments to resolve risks from implicit debt, which includes off-budget borrowing as through local government financing vehicles.

Some struggling local authorities could be under considerable pressure even though Beijing has increased payment transfers to cover their daily operations, including civil servants' salaries, said Han Yongwen, a special researcher to the State Council.

"Refinancing bond issues to extend maturity to as long as 30 years with lower interest rates around 4% is the main way for local authorities to buy time," said Zhang Yiqun, director of a fiscal studies institute affiliated with Jilin province's finance department. He noted that many maturing bonds carry higher rates.

IMPLICIT DEBT

Beijing is yet to announce its quota for refinanced local government bond issues this year. Yang expects it to total around CNY2 trillion, up last year's CNY1.89 trillion.

The market also expects part of the quota of local government special bonds, a key infrastructure investment driver, to be used to resolve debt risks. According to Yang, CNY200 billion in such bonds was set aside for small banks to replenish their capital last year and this can be funneled to their local authority clients via financing tools.

As for implicit debt, any move to resolve risks will be on a small scale and limited to county-level governments as Beijing wants a steady reduction, Zhang said. A pilot program is now helping some less-developed counties swap some outstanding implicit debt for lower-yielding bonds. "These counties not only find it hard to be self-sustaining fiscally, but their high debt could increase the risk of social instability," said Zhang. However, this program may not be widely available as the amount of implicit debt is huge and exceeds the book value of current total government debt.

Taking the total CNY46 trillion in central and local government debt at the end of 2020, the debt-to-GDP ratio is around 46%, which is lower than the EU's debt threshold of 60%, said Lv Wei, a member of the Financial and Economic Committee of the National People's Congress, the country's top legislature. Any new debt will be audited by the NPC but the current level is sustainable and will gradually decline as the economy grows, Lv added.

According to Lv, there is still time to improve reforms concerning the division of revenue between the central and local governments in order to match the responsibilities of each side. Local governments still lack major and stable sources of tax revenue after the value-added tax was reformed in 2016, Lv said.