ALBAWABA – Local governments have sold record amounts of so-called special bonds in 2023 to inject more liquidity to rescue China’s small banks in an effort to contain spillover risks from a staggering property crisis and stuttering economy.
Overall, local governments have sold $21.05 billion worth of special bonds, Reuters reported.
These special bonds, or special-purpose bonds, are a form of off-budget debt financing instrument used by local governments in China. Their proceeds are typically earmarked for specific policy goals, such as spending on infrastructure projects.
This time, it is intended to rescue China’s small banks, according to Reuters.
China's small banks, as well as regional ones, need to address the imminent issue capital shortfall. It is estimated that these banks need to plug a liquidity gap of an estimated 2.2 trillion yuan ($310.6 billion), as reported by Reuters. This estimation is based on a scenario where up to 20 percent of regional lenders face capital inadequacy, according to an October report by S&P Global Ratings.
China's small banks are exposted to the rising debts of local governments - Shutterstock
To avoid a financial crisis like the one in 2008, Beijing has authorized local governments to issue special bonds worth more than double the 63 billion yuan ($8.89 billion) bonds issued in 2022. It is the highest on record since the introduction of these instruments in 2020, Reuters reported, in an effort to help smaller lenders impacted by the COVID-19 pandemic.
Policymakers are highly concerned over rising debt levels, but Beijing has little option but to support smaller banks to contain spillover risks, according to Reuters.
Local government debt has reached $12.6 trillion, around 76% of China's economic output in 2022, up from 62.2% in 2019, according to the latest data from the International Monetary Fund.
On top of the $21 billion raised this year, the Henan provincial government last week announced a plan to issue $3.98 billion in special bonds to recapitalise 26 local banks, as reported by Reuters.
Smaller regional banks are the weak links in China's $61 trillion financial sector, as of the end of September. Rural commercial banks reporting a 3.18 percent non-performing loan ratio and city commercial banks at 1.91%, data from the National Administration of Financial Regulation (NFRA) showed.
