Comparatively minimal macroeconomic news of substance emerges from China; however, the information that does reach me through Bloomberg and other outlets offers little cause for optimism. To illustrate the initial point: a decade ago, China’s National Bureau of Statistics released over 80,000 economic indicators; presently, this figure has dwindled to fewer than 10,000.
Moreover, the protracted crisis in the property sector continues unabated, and recent reports on China’s Local Government Financing Vehicles (LGFVs) paint a bleak picture. A brief overview of the “news facts” includes:
- In late February, disclosures were made that a state-owned enterprise in China issued bonds, absent any equity relationship, to refinance the debt of an LGFV in Guizhou province, noted for its substantial debt burden.
- In the year’s initial months, Chinese regulators declined the issuance of 53 new LGFV bonds, marking the highest rejection rate since records began.
- In October, authorities in Beijing announced the issuance of approximately $140 billion in additional loans, propelling the budget deficit to exceed 3 per cent of GDP, an unusual occurrence. Notably, all these funds were allocated to LGFVs.
These examples are merely illustrative, yet they convey a troubling scenario regarding the state of Chinese LGFVs, a significant concern given their contribution to half of the nation’s government debt.
The short-term prospects for Chinese LGFVs remain uncertain, largely due to the dependency of local governments on the real estate market. LGFVs primarily generate revenue through land sales to property developers, a market currently in decline. Despite a recent increase in land sales, marking the first substantial rise in months, it originates from a notably low base. Furthermore, investment in property continues to decrease, indicating an absence of a recovery in demand from developers.
Historically, China’s central government has frequently intervened to resolve such issues with financial injections. However, as the overall level of debt swiftly approaches that of Italy, this approach is becoming less viable. This is evidenced by the difficulties LGFVs face in securing new loans or refinancing existing ones, leading to situations where state-owned enterprises must rescue the situation by assuming responsibilities for their debts.
This also explains why Chinese equities have not experienced the “mega rallies” of the past, driven by stimulus and liquidity. Such measures have been conspicuously absent, at least for the present, partly due to Beijing’s constrained capabilities. Regrettably, the situation cannot be portrayed in a more positive light.
Jeroen Blokland is the founder and manager of the Blokland Smart Multi-Asset Fund and the founder of True Insights, a platform offering independent multi-asset investment research. Previously, Blokland served as the head of multi-assets at Robeco. His “Chart of the Week” is featured every Monday on Investment Officer Luxembourg.