Just as Mao began his
March to Beijing from the impoverished Western Provinces of China, so now
another March is looming as those provinces grow poorer. Read and celebrate! Xi
will hope to die before this prospect takes shape – better than hanging from a
lamp-post in Tiananmen Square! Ha ha ha…
Bond investors beware: the Middle Kingdom is splitting down
the middle. Increasingly, international investors are being drawn to China’s
debt markets, the third biggest in the world behind the US and Japan, as
issuance soars and as central-government bonds start to be included in
global benchmarks. But any fund manager venturing beyond these safest
assets should consult a map before taking a plunge into provincial government
debt. It is not unusual for local governments to run big deficits in China. The
latest official figures show that only the wealthy urban municipalities of
Beijing and Shanghai posted a funding surplus in 2017. Revenues collected by
the other 29 provincial governments fell short of spending. But Moody’s, the
credit rating agency, has found that the regional differences between
provincial funding gaps are widening. Where eastern provincial governments
faced an average revenue shortfall of 27 per cent compared with spending,
those in central and western China saw gaps averaging 50 and 77 per cent,
respectively.
Much of the extra
spending out west is by design: China’s central government in Beijing has
sought to iron out regional inequalities by encouraging big infrastructure
projects, for example. But Amanda Du, senior analyst for sub-sovereign
debt at Moody’s Investors Service, said differences between regions had
worsened since 2015 and were expected to widen further. Since inland provincial
governments already have higher debt burdens from previous rounds of spending,
she said, their ability to issue further bonds was limited. Instead they would
continue to use off-the-books funds raised largely through
special financing vehicles. This has the effect of piling on more risk.
“As long as they have that gap they will have to rely on off-balance sheet
funding channels,” said Ms Du. The upshot is that international debt investors
may need to learn the difference between the provinces of Shanxi and Shaanxi.
The former has a funding gap equal to about 20 per cent of its total revenue.
Neighbouring Shaanxi, to the west, has a gap equal to 130 per cent.
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