World Economy

China Takes New Steps to Defuse Debt Bomb

China Takes New Steps to Defuse Debt BombChina Takes New Steps to Defuse Debt Bomb

Local government debt has always been seen as a time bomb ticking away beneath China’s economy. Central authorities have tried various ways to address the issue. In 2015, they unveiled a debt swap scheme aimed at extending the maturity of local government loans and reducing interest payments.

The ministry of finance has recently issued a document on plans to give investors easier access to local government bonds. Many regions have relied on infrastructure spending to bolster economic growth, a strategy that has resulted in local governments accumulating huge debt piles, EJInsight reported.

Such a growth strategy is not going to change any time soon, and that means the size of local government debt is going to get bigger.

Last year alone, local governments issued bonds worth a combined 6.05 trillion yuan ($880.4 billion), up more than 57% from 2015, according to data from China Bond Rating.

It is estimated that the debt issuance size of local governments this year will reach 6-7 trillion yuan, including 5-6 trillion yuan of bonds issued for swapping existing debt and 1 trillion yuan of new bonds.

Under current rules, non-financial institutions and individual investors have limited access to local government bonds. But this is going to change.

The ministry of finance said authorities are studying the interbank market with the aim of allowing non-financial institutions and individuals to invest in such assets. However, the low return of local government bonds may only appeal to conservative investors.

Meanwhile, central authorities have been promoting public-private partnership in infrastructure projects.

If private companies and local governments could issue bonds jointly to raise funds, that would help promote the PPP model as well as ease the financial burden of local governments.

In view of all these initiatives, the local government debt issue may gradually be resolved.

Meanwhile, the People’s Bank of China has done trial runs of its prototype cryptocurrency, taking the central bank a step closer to issuing digital money that can be used for all sorts of transactions.

If things go according to plan, the PBoC will become one of the first major central banks to issue digital money, Bloomberg reports.

For users transacting over their smartphones or laptops, a PBoC-backed cryptocurrency probably wouldn’t seem much different to existing payment methods such as Alipay or WeChat.

But for sellers, they would get digital payments directly from the buyer, lowering transaction costs as the middleman is cut out of the process, the report said.

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