Will China sell local debt to foreigners?

Do you remember all that local government debt the central bank wants to refinance? You know, the damaged goods that neither the People’s Bank of China nor the country’s commercial banks want to touch? Well, today’s installment of what to do with the debt comes from Bai Weiqun, vice president of the China Central Depository & Clearing Co. (CCDC)

Addressing a financial forum on Tuesday, Bai said China should open up its sheltered local debt market to foreign and retail investors to shore up market demand and liquidity, reported Reuters. Bai said the problem was that with banks buying more than 90% of the government bonds, there is “close to zero” liquidity.
Of course, that’s the problem. It’s not like banks trade and provide liquidity for government bonds in every other country on the planet.

Central bank officials have said that some qualified foreign investors are permitted to buy local government bonds. It’s not clear if any foreign takers are stepping up to the table.

Still, Jiangsu province managed to hold a municipal bond auction on Monday, the first of the year. Bai said it was “very successful” because it achieved a yield just above sovereign debt.

So, who knows? Some analysts think China’s government can get a handle on the debt problem. If it happens, these bonds could offer competitive paybacks and end up being viable investments. Remember, China’s economy is still growing at a clip that is the envy of any country in the West.

Some cynics might see Bai’s proposal as a way to get stupid foreigners to buy local government bonds that Chinese banks won’t touch with a 10-foot-pole.

Well, China’s local debt bonds won’t be triple-A. But Chinese bankers and shareholders likely have a different take on the issue of ratings and selling debt to foreigners.

Chinese banks lost billions in 2008-2009 from subprime mortgage instruments peddled to them by Wall Street investment houses. Needless to say, folks like Moody’s and S&P gave their highest ratings to this mountain of debt which included loans to home buyers with bad credit and undocumented incomes. Who wants to point the first finger?



Categories: Asia Unhedged

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