HSBC: China'S Local Government Debt Restructuring Time Is Ripe

According to the instructions of the central economic work conference, the debt of local governments will be strictly controlled next year.

This is a necessary task to prevent a new round of debt accumulation, but the Chinese government still needs to provide supporting programs for financing huge local infrastructure.

In Qu Hongbin's view, the most viable option is the bond loan swap scheme to help Chinese banks get out of the woods.

The central government can issue more long-term construction bonds on behalf of local governments, so that local governments can restore loans for public utility projects.

Since the scheme does not need to change the financial framework of the current central and local governments, it is easiest to implement.

Since last year, the Chinese government has issued 200 billion yuan bonds on behalf of some local governments to support selected local projects.

In addition, compared with the direct issuance of bonds by local governments, the financing cost of issuing bonds by the central government is relatively low.

And there is no problem with the demand for central government bonds. The reasons are: 1) at present, there are a lot of idle funds in personal savings accounts; 2) the development of China's Contractual Savings, such as insurance and mutual funds, has increased the demand for such government debt instruments.

Qu Hongbin expressed the expectation that the central government could pilot the issuance of bonds by local governments in their own name.

The Ministry of Finance representing local governments to issue bonds is more likely to be pitional arrangements during the crisis period, and local government debt restructuring requires more pparent local governments' balance sheets and continuous investment in local infrastructure projects.

Therefore, in the long run, allowing local governments to issue bonds in their own name for financing infrastructure projects is a good choice.