Inside China: challenges for muni bonds

Author: | Published: 9 Dec 2014

Can the new breed of municipal bonds refinance local governments’ non-performing debts?

Local government debt and looming real-estate bubbles are believed to be China's two major economic risks. International financial institutions are sounding the alarm by pointing to the numbers published by China's National Audit Office. According to the Office, the outstanding balance on local government debt was about CNY 3.2 trillion ($521 billion) in 2008, CNY 10.7 trillion in 2010, and CNY 17.9 trillion at the end of June 2013.

Today, land reserves and local state-owned enterprises are the main forms of local government assets. Due to the fact that most of their debt is secured with real estate, local governments have a strong interest in maintaining and even increasing real estate prices. Unfortunately, this constant upward pressure helps to trigger real-estate bubbles.

On the liabilities side of their balance sheet, bank loans, bonds and shadow...