Debt Bondage

THE NATIONAL DEVELOPMENT and Reform Commission, China’s top economic planning agency, has chipped in its two-fen-worth on the country’s local-government debt problem, saying that debt levels overall are under control but it will curb the “disorderly expansion” of further debt.

All much as would be expected. But what caught this Bystander’s eye was the NDRC’s suggestion that some of the local government captive commercial investment vehicles used to get round restrictions on direct borrowing by provincial and municipal governments would be allowed to issue bonds to replace high-short-term debt carrying high interest rates.

That is perfectly sensible financial management but it also marks a radical advance in what has been cautious steps in broadening bond issuance. It may suggest the strains on the financial system, and particularly the shadow banking system, which would be the most likely source of high-interest debt, are more acute than is being publicly acknowledged.

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