China will face another potential financial crisis in 2020 when local governments must pay-off over $283 billion in maturing municipal debt.
The Sino-U.S. trade war has cost the Chinese economy about $117 billion as the Trump administration relentlessly ratcheted up tariff rates over the last two years. China protected domestic jobs by directing local government to subsidize the tariff costs through a combination of business tax cuts and increases in infrastructure spending.
The strategy allowed the state-owned industries in China’s provinces and cities to hold sales prices steady to keep production volumes up. The local governments delayed funding the cost burden by selling larger and larger amounts of municipal bonds.
But the annual cost of Chinese municipal bond debt maturities has ballooned from $34 billion in 2017; to $118 billion in 2018; $183 billion in 2019; and is expected to top $283 billion in 2020, according to Bloomberg.
Local authorities would like to push paying off the maturing debt into the future by selling even larger amounts of municipal bonds. The China State Council granted local government the authority to sell $303 billion to pay-off the maturing debt and fund $20 billion of new local spending for transport, energy, agriculture and forestry, vocational education and medical care.
But the appetite by foreign and domestic investor to buy more Chinese communist government debt has shriveled over the last two months, pushing interest rates up and bond prices down. Ken Cheung, Chief Asia FX strategist at Mizuho Bank Ltd., warned: “The large amount of supply that will be rolled over will weigh on [the prices of] China’s sovereign bonds.”
If selling huge amounts of additional municipal bonds pushes interest rates up, China may be forced to spectacularly increase the money supply. Such a “printing money” move would accelerate inflation that is already running near a six-year high of 3 percent in September, driven by food inflation of 11.2 percent.