China Can No Longer 'Extend And Pretend' On Municipal Debt  

• China's promised "basket of measures" to defuse local government debt risks is likely to include special bond issuance, debt swaps, loan rollovers, and something Beijing loathes: dipping into the central budget.
• Local governments are fundamental to China's economy with Beijing tasking provincial and city officials with meeting ambitious growth targets. With that being said, after years of over-investment in infrastructure, plummeting returns from land sales and soaring COVID costs, economists say debt-laden municipalities now represent a major risk to China's economy.
• Chinese leaders last month pledged, without detailing, to help ease their debts, signalling worries over a potential chain of municipal debt defaults destabilising the financial sector. Economists took that message as being more constructive than in April when Communist Party leaders demanded "strict control" of local debts. The implication, they say, is that Beijing has realised it needs to urgently throw cash at the problem.
• That could represent a major breakthrough in finding a way out of China's municipal debt crisis, with Beijing having for years demanded that local administrations sort themselves out. "The local debt problem is complex so you cannot simply say you don’t want to take responsibility," said Guo Tianyong, professor at the Central University of Finance and Economics in Beijing, explaining the politburo's directions.
• The extent of any central government involvement, and any conditions attached to it, are still subject to debate, two policy advisers told Reuters. Whether the package of measures will be a short-term or multi-year plan also remains unknown.

(Source: Reuters)