On August 22, China plans to allow local governments to issue 1.5 trillion yuan of special refinancing bonds to help 12 provinces and regions, including Tianjin, Guizhou, Yunnan, Shaanxi and Chongqing, to repay their debts, according to Caixin. The People's Bank of China (PBOC) may set up an emergency liquidity financial vehicle (SPV), with the participation of major banks, to provide liquidity to local urban investment companies with lower interest rates and longer maturities.
Some people in the market say that this is China's version of quantitative easing (QE), and the government is about to start releasing water again.
Before answering this question, let's explain what special refinancing debt is.
The so-called special refinancing bonds are mainly used by local governments to repay existing debts, especially hidden debts. To put it bluntly, the central government gives new borrowing lines to local governments and borrows new money to repay old money.
In addition, this special refinancing bond is a supporting policy proposed by the Politburo meeting on July 24 to "formulate and implement a package of bonds", which also shows that the 1.5 trillion yuan of special refinancing bonds this time is mainly for "debt transformation".
In fact, special refinancing bonds are nothing new. From 2020 to 2022, this tool has been enabled, mainly in two directions:
First, it is used for the pilot of hidden debt risk resolution in established counties and districts, mainly helping high-risk areas to resolve debt risks, with a scale of 612.8 billion; The second is to be used for the pilot of no hidden debt in the whole region, mainly rewarding regions with good debt control, with a scale of 502.4 billion.
Moreover, the 1.5 trillion yuan special refinancing bond is not a new issuance line, but occupies the existing debt limit space: according to data from the Ministry of Finance, by the end of 2022, the national local government debt limit was 37.6 trillion yuan, and in the same period, the national local government debt balance was 35 trillion yuan, and there was a space of 2.6 trillion yuan between the two.
The 1.5 trillion yuan of special refinancing bonds is equivalent to taking up the unused debt quota of local governments at all levels last year.
The advantage of issuing special refinancing bonds is that it converts implicit debt into explicit debt.
Generally speaking, the debt of local governments is divided into two parts, one part is called explicit debt, that is, those local government debts that are recorded on the books, and the other part is called hidden debt, which will not be recorded on the bright side, such as the money raised by the government through urban investment companies using loans and issuing bonds.
Compared with hidden debts, explicit debts are more open and transparent, which is more conducive to risk prevention and supervision by regulatory authorities. This operation is also mainly to reduce the risk of local government debt.
Let's look at it, is 1.5 trillion a big deal? In fact, it's not big -
By the end of 2022, the scale of central and local government debt was about 61 trillion yuan (accounting for about 50% of GDP), of which the balance of local government debt was 35.07 trillion yuan. According to institutional estimates, by the end of 2022, the balance of local financing platform debts that are not included in local government explicit debts is as high as 59 trillion yuan, and the annual interest cost paid for this is about 3 trillion yuan.
Therefore, the main purpose of the 1.5 trillion yuan special refinancing bond is to help local governments resolve debt risks in the short term, which is not in line with "quantitative easing".
Why is there a Chinese version of quantitative easing (QE) in the market?
Mainly because the phrase "the People's Bank of China may set up an emergency liquidity financial instrument (SPV)" may create the impression that "the central bank has invested 1.5 trillion yuan of liquidity".
However, in detail, although the central bank will provide liquidity support, it is mainly commercial banks that contribute money to provide financing support to local financing platforms.
Compared with the operation of quantitative easing in the United States, the Fed directly contributed money and directly invested several trillion dollars of base currency, and the Chinese government's operation this time can only be said to be a trickle.
Therefore, this is not at all China's version of quantitative easing (QE) – because the new market liquidity is relatively small and the coverage of capital flows is narrow, and it is difficult for most companies and residents to benefit from it.
- For the urban investment bond market, it is good news: it can ease the market's concerns about the credit risk of urban investment and improve the refinancing ability of urban investment enterprises. At present, the market has reacted, and the issuance of urban investment bonds in Tianjin has heated up significantly recently, and credit spreads have been greatly compressed.
- For other companies and stock market investors, it is difficult to say good news, because it is difficult to get a piece of the 1.5 trillion pie, and there is a risk that liquidity will be sucked away.
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