China’s burst of local bond issuance is supposed to fund roads, affordable homes and other infrastructure developments that will help support its flagging economy. But there don’t seem to be enough projects around to spend the money on.
Provincial authorities had by the end of September already raised 92 percent of the 1.35 trillion yuan ($195 billion) worth of special infrastructure bonds that the central government has targeted for the entire year. The bonds, which are separate to provincial authorities’ budgets, are part of an attempt to counter the economic slowdown by financing projects from railwys to environmental facilities and affordable homes.
But analysis of bond data by Bloomberg News shows that about 42 percent of the total special bonds sold since August are earmarked for “land reserves,” which means compensating farmers for property acquisition or preparing the acreage for future development. In short, the economic boost of the debt creation will be less immediate than if it was used to build highways or redevelop sub-standard housing straight away.
This is interesting because so much media coverage has been focused on how China can easily ‘open the taps’ to keep credit flowing in the event of an economic slowdown. What’s rarely discussed is how ineffective stimulus becomes the more it’s used (especially when bloated SOEs are involved), it’s been a tool the government has constantly relied on and it appears to have hit the limits of its effectiveness to maintain high quality growth.
Including corporate debt China’s overall debt to GDP is close to 300%. The property market is in bubble territory and the state owned banks have become bloated with non performing loans. The trade war has forced the deleveraging campaign to go into reverse. It’s shocking to me how shortsighted the state is being in not getting the frightening levels of debt within the system under control, the average Chinese investor doesn’t own a lot of stocks, property is their investment of choice. If economy continues its downward spiral and the property bubble collapses it could endanger the stability of the entire system.