China mulls new monetary tool that ‘the world has never seen’
from Market Watch: China’s central bank is considering lending to policy banks through a new tool so they can buy bonds issued by local governments, a person close to the regulator says. The loans would have a maturity of at least 10 years, the source said. Other details of how this would work remain unclear, but the tool will be unlike anything the bank has used before, he said. “It will be a new monetary tool the world has never seen,” the person said. “The format does not matter, and all possible means could be taken.” He said the regulator will use the new instrument to provide China Development Bank (CDB) and perhaps other policy banks with capital so they can buy bonds that local governments have issued. The Ministry of Finance has said local governments can issue 1 trillion yuan ($160 billion) worth of bonds this year to repay their old debts — in other words allowing them to swap existing debts, which are mostly bank loans, for bonds that have longer maturities and cost less. The problem is that commercial banks are not interested in the bonds. Banks are “not at all interested” in buying such bonds because “their yields are too low and there is no liquidity,” a source from a joint-stock bank said. He said the bank he works for bought some local-government bonds only because its branches want to maintain a good relationship with local governments. Xu Hanfei, chief bond analyst at Guotai Junan Securities 1788, -3.20% said the interest rates of bank loans to local-government financing platforms — commercial vehicles that local governments used to circumvent a previous restriction that barred them from borrowing directly — are usually around 8%, and so are the yields of these platforms’ bonds. With local-government bonds, he said, the yields are usually halved. “Commercial banks do not want to buy local-government bonds … because the yields can hardly cover their capital cost,” a source from a bank’s financial-market division said. “There are many more assets that promise much better returns than local-government bonds. Why bother exchanging them for the bonds?” As of June 30, 2013, local-government debt including direct and contingent liabilities reached almost 18 trillion yuan, data from the most recent national government debt audit show. Part of the solution that has been worked out by the central government was to revise the Budget Law, which prohibited local governments from borrowing directly, and allow them to issue bonds. Analysts say this is a more sustainable and transparent way of financing government operations. There have been discussions about how existing platform debts that essentially have to be repaid by local governments should be dealt with, and the mainstream view is that they should be gradually replaced with bonds issued by the local governments. However, “without extra liquidity support … the whole debt swap will amount to building a castle in the air,” said Liu Yuhui, a professor at the Chinese Academy of Social Sciences (CASS). Policy banks buying local-government bonds would amount to transferring the debt borrowed by local-government financing platforms from the balance sheet of commercial lenders to those of the policy banks, he said. “This will happen sooner or later, and (the regulator) might as well just let policy banks handle it now.” “It is kind of unrealistic to expect the CDB to take all of the 1 trillion yuan worth of bonds,” a source from the bank said. “Half of that would be too much already.” He also said that the regulator may at last have to involve some commercial banks in its scheme. Having their debt become bonds “would reduce the pressure of repayment on local governments because both the interest rates and maturities will be different,” said Yin Jianfeng, deputy director of the CASS’ Institute of Finance and Banking.