And the financial reforms, discussed extensively in our last Your Compass On China (May 2014), continue unabated and at a fast pace. The following reuters newsreport only underlines what we have been saying all along:
(Reuters) - China's cabinet signaled on Tuesday it is closer to letting local governments directly sell bonds for
the first time and said it would phase out opaque financing vehicles
that are thought to have built up trillions of dollars of high-risk
debt.
In
a sweeping statement, the country's top economic planner, the National
Development and Reform Commission (NDRC), said Beijing would deliver
stable economic growth whilst pursuing reforms.
The
promise to stay focused on reforms would appease critics who worry
China's enthusiasm for bringing about painful changes may be on the wane
as its economy stumbles.
The
uncertain outlook for the world's second-largest economy was
underscored on Tuesday by remarks from a senior Chinese trade official,
who said the country has a tough road ahead if it wants to meet its 7.5
percent trade growth target this year.
Yet
the NDRC said in a statement on its website that enacting change is a
"first priority" for the government and hopes to make breakthroughs this
year in key areas.
On
fiscal reform, which caused a market stir on Tuesday after Chinese
media reported that China would allow 10 local governments to directly
sell municipal bonds, the NDRC signaled that the government won't disappoint investor expectations.
It said China will create a financing system for local governments that will let the sale ofmunicipal bonds be a major source of funding for governments.
Financing
vehicles, which are set up by local governments to borrow on their
behalf so as to get around laws that prohibit governments from borrowing
directly from any parties, would also be phased out.
It said that Beijing would set limits -- or quotas -- on the amount of debt that can be raised by local governments.
"The
policy has been made talked about several times, so the market is now
waiting for details, in particular how the quotas will be set," said a
senior trader at a major Chinese state-owned bank in Shanghai.
"I don't think the central government will immediately let local governments issue lots ofbonds and endanger the overall financial system."
A LONG-TERM SOLUTION
According
to Chinese media, China is set to allow the 10 governments that include
Zhejiang, Jiangsu, Shandong, Guangdong, Beijing, Shanghai and Shenzhen
to directly sell municipal bonds.
Tuesday's
statement did not refer to the above plans, though many analysts have
said that the only viable, long-term solution for China with regards to
its local government debt problem is to develop a thriving municipal
bond market.
By
allowing direct bond sales, Beijing can require higher degrees of
disclosure in prospectuses and can also allow for the distribution of
risk to a wider pool of potential investors.
Chinese
local governments at present have limited legal options for fund
raising, but have proven nimble at exploiting loopholes.
In
addition to selling land to raise funds, they have created local
government financing vehicles which have gone to the bond and loan
markets to raise funds.
Local
Chinese governments, which are notorious for being opaque, are
estimated by some analysts to owe up to $4 trillion - 42 percent of
China's GDP - much of it raised through financing vehicles.
A state audit of local governments' debt in December showed they owed a total of $3 trillion as of June 2013.
But
despite concerns about the fiscal health of local governments, bonds
sold by their financing vehicles are still sought after by investors.
This is partly because many believe they are implicitly guaranteed by
the state, even after Beijing allowed the country's first
publicly-traded bond to default this year.
Other
reforms canvassed in the NDRC guidelines included repeating commitments
to a more market-oriented exchange rate, cutting red tape and deepening
energy reforms.
"We
should seize this time window when the overall price level is stable to
actively push price reforms in resource products and sectors including
transportation, telecommunications, pharmaceutical and healthcare
industries," the NDRC said.
(Reporting by Aileen Wang and Koh Gui Qing in BEIJING and Pete Sweeney and Lu Jianxin in SHANGHAI; Editing by Kim Coghill)
