China’s Domestic Debt In The Spotlight; Nearly $2 Trillion And Counting

Debt crisis shrinks international use of euro

China’s foreign debt is around $750 billion, and rising. The domestic debt owed by Chinas municipalities is closing in on $2 trillion, according to a recent government audit of 36 local governments. Last week, the National Audit Office (NAO) issued a new report that showed debt in the those 36 selected areas had grown 13% in the last three years. Moody’s Moody’s Investors Service estimates the direct and guaranteed debt of local governments nationwide was around 12.1 trillion yuan ($1.97 trillion) at the end of 2012, up from 10.7 trillion in 2010. Exact numbers are an unknown due to the special finance vehicles municipalities use to invest in pet-projects, from roads and bridges to residential complexes and shopping malls. Selected local governments in the NAO report comprise 15 provinces and the 15 provincial capital cities, as well as three municipalities and three districts. Other Chinese officials have even higher estimates, the China Daily reported on Sunday. Dong Dasheng, deputy minister of NAO, said the latest debt scale for governments at all levels was between 15 to 18 trillion yuan. Xiang Huaicheng, a former finance minister, said in April that Chinas local governments might have already borrowed more than 20 trillion yuan. The number keeps getting higher rather than lower. I personally agree with former minister Xiangs estimate of 20 trillion yuan stock in local debts, Zhao Quanhou, head of financial research with the Fiscal Science Research Center at the Ministry of Finance told the Daily. China banks have been in the spotlight since last week. Last Sunday, the Central Bank issued a statement saying it would not support small to mid-sized muni-banks which have over financed and mismanaged their risks. Interbank rates had skyrocketed in a short period of time to more than 11%; this in a country where interest rates are more commonly had at around 3.5% to 4.5%. But when the market panicked that China was facing a Lehman Brothers style liquidity crisis, the Central Bank quickly back pedaled and said it would provide financial assistance to troubled muni-banks. See: Is China Right To Brush Aside Credit Squeeze? CNBC Beijing and the finance regulators are especially concerned that municipalities have used their special financing vehicles as a pension fund product for wealth management firms who are investing in real estate and other hard assets with no return whatsoever. Beijing tightened regulation of the financing vehicles last year in a move to choke the munis so-called shadow banking system. This shadow banking system makes it nearly impossible for China to get a grip on the overall debt burden at the state level because a lot of those loans do not show up on bank balance sheets. On the plus side, traditional bank loans remain the largest source of financing for local governments, accounting for 78% of the total balance by the end of 2012. But their share has decreased by 5.6 percentage points since 2010 as the shadow banking system grows. Debt issuance like bonds have risen by 62% over the last year as well. Bank loans and bond issuance together account for approximately 90% of the debt on local government books, while the other 10% consists of private equity funds and non-performing loans from real estate. According to a calculation by The Economic Observer , local governments will face two trillion yuan in debts due this year. China Daily pointed out today that the figure is equal to nearly 20% of municipalities fiscal revenues and more than half of their fees from land sales. Chinas foreign owed debt is $764 billion. The International Monetary Fund puts Chinas total debt to GDP at around 22% this year, slightly down from 22.8% in 2012. By comparison, Japan’s debt-to-GDP ratio is well over 100% and that of the U.S. is closer to 90%.
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CANADA FX DEBT-C$ marginally weaker ahead of jobs data

cents * U.S. markets closed for Independence Day * ECB, BoE issue dovish policy statements * Focus on U.S., Canada jobs data on Friday * Bond prices mostly higher across maturity curve By Solarina Ho TORONTO, July 4 (Reuters) – The Canadian dollar was marginally weaker against its U.S. counterpart on Thursday, as investors mostly kept to the sidelines ahead of North American jobs data on Friday and with U.S. markets closed for the Independence Day holiday. Markets were primarily focused on overseas news, where the Bank of England and the European Central Bank both gave dovish outlooks. The central banks are trying to offset the impact of an expected stimulus withdrawal by the Federal Reserve later this year. Just four days into his new job, BoE Governor Mark Carney surprised markets with a statement indicating the bank was in no rush to raise rates, while the ECB’s Mario Draghi said it would keep interest rates at record lows for an extended period and may yet cut further. The Canadian currency, which had strengthened to C$1.0472 per U.S. dollar following the ECB comments, closed the North American session at C$1.0521 versus the U.S. dollar, or 95.05 U.S. cents in spotty holiday trading. This was slightly weaker than Wednesday’s finish at C$1.0510, or 95.15 U.S. cents. “We just seem to be sitting in that zone between support and resistance,” said Don Mikolich, executive director, foreign exchange sales at CIBC World Markets. The United States and Canada will both report monthly labor data tomorrow, with the U.S. numbers expected to show steady improvement in the jobs market. In Canada, economists are expecting a drop in jobs, according to a Reuters poll, following the surprising 95,000 jobs created in May. “In Canada, there’s expected to be a bit of give back from last month’s pretty stupendous number,” said Greg Moore, FX Strategist at TD Securities, which is forecasting a greater-than-consensus decline in jobs. CIBC’s Mikolich said the Canadian data would have to be fairly negative for the Canadian dollar to sell-off. “Even if you see a small negative, you could argue, well, the average over the past few months is still overwhelmingly positive,” he said. Prices for Canadian government debt were higher across the maturity curve. The two-year bond climbed 2.5 Canadian cents to yield 1.181 percent, while the benchmark 10-year bond added 2 Canadian cents to yield 2.417 percent.
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dollar held debt settlement its own as the world’s leading currency for reserves held by central banks. Currencies not traditionally used as reserves, such as the Canadian and Australian dollars, gained in favor, as those countries enjoyed steady growth and lower debt than major economies. The European Central Bank said this week that the euro’s share among the currency reserves held globally by central banks fell to 23.9 percent in 2012 from 25.1 percent in 2011. The dollar’s share was little changed at 61.9 percent. Related News/Archive Why the U.S. should care about Europe’s fiscal crises More than a Year ago The ECB said the financial crisis that has afflicted the 17-country eurozone was a factor discouraging use of the euro for reserves, which are often held in the form of government bonds. Lending across borders in the eurozone has dropped, diminishing the liquidity that reserve holders like to see. Lower liquidity means there are fewer buyers and sellers readily found. The eurozone countries have struggled with heavy levels of public debt Greece, Portugal, Ireland and Cyprus have needed financial rescue. Even larger economies like Spain and Italy have worryingly high debt. In its annual report on international use of the euro, the ECB also found that there was less borrowing in euros internationally by companies because they could get lower interest rates by selling bonds denominated in U.S. dollars. Countries hold reserves of foreign currency to help backstop their own currencies’ value in case of a financial crisis and for trade purposes. The country issuing the reserve currency can benefit because demand from abroad supports its exchange rate and can mean lower borrowing costs for the government, as has been the case with the U.S. dollar in its role as the leading reserve currency. Demand for dollars in the form of U.S. Treasury bonds by other countries such as China helps keep down the interest rate that the U.S. government pays to borrow. A key finding of the report was that nontraditional reserve currencies such as the Canadian dollar and the Australian dollar are in greater demand because of their growing economies and better public finances. The category of “other” currencies saw its share of officially disclosed reserves increase from 5.7 percent to 6.1 percent, ahead of both the yen at 3.9 percent and the pound sterling at 4.0 percent. Debt crisis shrinks international use of euro 07/04/13 [Last modified: Thursday, July 4, 2013 6:56pm]
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