2014-08-29

一举两得: Relief for Local Govt Also Boost Financial Sector

The reforms of Xi and Li have a problem. On the one hand, they must constrain local governments' ability to interfere in the market, including falling back on the "easy" growth model of infrastructure development. On the other hand, there's going to be a serious debt crisis if the property market slows and cities can't borrow. Solution: cut financing costs.

China's local governments can swap out of pricey debt: FinMin
In a speech in parliament about China's fiscal system, Lou said China will control the amount of money borrowed by its regional governments by ensuring that all their debt is accounted for in their budgets.

Regional governments, responsible for the bulk of China's public spending but getting less than their share of total fiscal income compared to the central government, have relied on borrowing heavily in recent years to stay viable.

To ease the financing pressure, Lou said governments that are stuck with expensive debt can replace them with cheaper municipal bonds - subject to approvals - to lower their interest payments. No further details were given.

The comments on muni bonds comes as the government launches the strict land sale and land finance audit. It is not a coincidence. Allowing local governments to lower their debt financing costs is a very pragmatic reform that deals with the crisis threat, but doesn't let local governments off the hook.

This reform plan also kills many birds with one stone. The local governments can swap their debt, but will still be restrained by large debt levels. It creates a new market for savings to compete with shadow banks. It helps develop internal financial markets and importantly, deeper bond markets that will be necessary for a freely convertible yuan.

Power is being taken away from local governments and transferred to the financial markets. This was the reform template of Zhu Rongji in the early 2000s, but his plans were thwarted when insiders took power in 2005. One of his goals then was to open the A-share market to foreigners. That will finally happen less than two months from now. The SOE reforms underway are also a blow to local governments ability to dominate the market. This isn't news.

Back in November 2013, Li Keqiang was telling governments to get out of the economy:
China Premier Li Keqiang said local governments should stop directly investing in or setting up companies “in principle,” according to comments released a day before leaders gather to discuss economic policy.

Allowing local authorities to invest in companies or to intervene in their operations can ‘easily’’ lead to monopolies and market barriers, Li was cited as saying at a Nov. 1 meeting, according to a statement posted on the central government’s website today.

Or Li reminding them this year:
At one meeting, on May 30, Li reportedly pounded the table as he blasted local officials for inertia in carrying out central government directives.

He accused departments of micromanaging the economy and wasting time and resources examining and approving projects and deals that were entirely commercial matters unrelated to national security or strategic industries.

Everything from the audits, anti-corruption campaign and anti-monopoly campaign to tight credit, financial market and SOE reforms, are all aimed at the same goal of a market economy. With the opening of the oil market, launching of the international gold market, growth of the muni bond market and opening of the stock market, the China of 2020 is slowly coming into focus. The short-term remains precarious, but long-term the outlook is steadily improving.

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