Money is pouring into Chinese government bonds. The buying has bid up prices and forced yields down to near record lows. The move has upset the Peoples Bank of China (PBOC), which has expressed considerable concern over what will happen to China’s financial stability when the rally reverses and people, especially banks, suffer losses. Behind these concerns, however, is a much bigger and more fundamental worry over what such low bond yields say about China’s economic prospects.
The yield declines began in earnest in January 2023. That month, the 10-year government bond yielded just about 3.0%. Buying pushed yields down gradually to 2.7% in by October 2023. After that the move gained momentum, driving yields down to 2.4% by February of this year and then to 2.0% into mid September. Investment monies have come into this market from just about every quarter of the economy. According to Win.d, a China-based financial services firm, bond funds have grown some 39% from the beginning of 2023 to mid-August, the most recent date for which data are available. Bond investing now accounts for some 35% of all Chinese fund assets, compared to less than 10% for equities investments. Commercial banks have about doubled their holding of government bonds since 2022.
The trouble is, this embrace of a more expansionary policy in China’s capital is effectively getting canceled out in the provinces – where authorities are in full belt-tightening mode.
Beijing allocated a large chunk of proceeds from this year’s special sovereign bond sales to subsidies for households and companies that buy new equipment in an attempt to boost demand — something that never happened before. Previously the favored way to spur growth was spending on things like roads, railways or industrial parks, much of it done by provincial governments.
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Still, it’s not clear if the cautious change of direction in the capital is enough to offset what’s happening at the local level. That’s because regional governments, whose spending was once a key driver of growth, are now focused on scaling back their dangerous debt burdens.
China’s provinces are selling new special bonds, which are supposed to be spent on investments expected to generate returns, at the slowest pace since 2021 — falling well short of their quotas, amid a dearth of suitable projects now that the country is saturated with infrastructure.
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Meanwhile, they’re running short of cash to meet daily spending needs — like paying salaries — which are funded by tax revenues, as their income gets squeezed by the real estate slump and broader economic slowdown. Many local authorities have resorted to delaying payments to contractors, imposing hefty fines and dinging companies with tax bills that date back for decades.
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They’re scrambling to comply with President Xi Jinping’s crackdown on so-called “hidden debt” used by China’s regions in the past to stoke growth.
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“A fiscal-confidence spiral could be a major risk looming ahead,”
finance.yahoo.com/news/china-attempt-boost-demand-stifled-000001731.html
Pumping out debt isn’t the only way to get growth. China for years has sought ways to stoke domestic consumption. That is probably the next chapter for China’s economy. In the meantime, the stakes are rising. If consumers don’t pick up the slack, the economy slows, bad debts are likely to rise even further, and a nasty case of financial dyspepsia will turn into something worse.
www.reuters.com/breakingviews/chinas-banks-have-nasty-case-indigestion-2024-09-10/
h/t mark000
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