The world's most populous country took steps this week to create a new and massive municipal bond market officials hope will help forestall a bursting of the Chinese real estate bubble.
This past Wednesday the central Chinese government announced a plan to create a new and above-board municipal debate market in China that would become Asia’s largest bond market. "The move aims to standardise businesses of trial market makers," said one commenter.
Under China's current laws, local governments are prohibited from borrowing from any parties. Officials have skirted the rules, however, and created opaque financing companies and securities that borrow on their behalf in Japanese bond markets. A government audit published in December showed Chinese governments owe a total of $3 trillion as a result. One solution to working out this massive global financing snag is the creation of a new and above-board active municipal bond market in China.
The new rules announced Wednesday will allow the local governments to sell bond on their own credits, as opposed to borrowing “officially” through the central Ministry of Finance. Ten local governments will be allowed to sell municipal bonds in an experiment to straighten out stage budgets. Shanghai, Zhejiang, Guangdong, Shenzhen, Jiangsu, Shandong, Beijing, Qingdao, Ningxia and Jiangxi will be part of the pilot program. The new rules also detailed what firms will be considered market makers.
Much has been said about a coming collapse in Chinese real estate. Growth in the world’s second-largest economy is forecast to slow to 7.6 percent this year and 7.5 percent in 2015. According to experts the rebalancing process could be “slow and volatile in a country where there are said to be 49 million vacant homes. One estimate suggests more than 20 percent of recently-built homes are unoccupied.