China: Bond Issues and Fundraising Challenges
The Chinese government has encountered difficulties in selling its government debt. The problem, which will hamper Beijing’s efforts to fund its economic stimulus package, is an odd one for a country with so much excess capital.
Beijing failed in its effort July 17 to sell government debt, indicating that even the Chinese government may be souring on its financial plans. The Chinese had hoped to get investors to purchase 20 billion yuan in bonds, but only succeeded in selling 18.51 billion yuan ($2.7 billion). For the third failed auction this month, interested buyers simply were not available in sufficient numbers.
China plans to pay for almost the entirety of its new $586 billion development plan (referred to in the media as a multiyear “stimulus package”) by taking on various types of debt; bonds figure prominently into the fundraising. Whenever governments fail to sell 100 percent of the bonds, it is considered a “failure,” as it means the government will have to find another source of capital.
Bond issuances do fail from time to time; and while this rarely proves disastrous, it rarely is a good thing: It indicates that investors would rather put their money somewhere else. Bond failures automatically raise questions of the credibility of the country’s financial system and the creditworthiness of the government in specific. Immediate consequences typically involve higher interest costs for the government that is trying to raise money. The rate the Chinese government has had to pay to attract investors already has gone up by 45 basis points (0.45 percent) this month, rising 10 basis points simply while the bond auction was occurring (to 1.595 percent).
When an American bond auction fails — rare, but it does happen — critics often point to the sheer size of the U.S. budget deficits as overwhelming whatever investors’ cash might be available for bidding. For example, in U.S. President Barack Obama’s first year, the deficit is likely to hit an unprecedented 12 percent of gross domestic product largely because of the U.S. stimulus package. But U.S. government debt is not only issued in the global currency, the U.S. dollar, it is backed by the “full faith and credit” of the world’s economic and military superpower. That might not mean as much in the public discourse as it once did, but even the U.S. dollar’s top critics — Russia and China — regularly put the bulk of their savings in U.S. government debt if for no reason other than that there is no alternative.
In recent months, we have seen bond issuances fail in countries as rock-solid as Germany, and fail disastrously in places like Latvia. The end result for all these states is the same: They need either to find more creative ways of raising money, or to learn how to do more with less.
But China is a very odd case. China has more than $2 trillion in currency reserves built up as a result of years of running massive trade surpluses with the United States. And this is not China’s only source of capital. Beijing greatly restricts what its people can invest in, giving it access to a vast pool of savings with which to jury-rig the country’s financial system. The Chinese development model is predicated on providing below-inflation, sometimes even below-zero, loans to its firms to maximize employment and maintain social stability. It can afford to do that by forcing potentially restive employees to deposit their savings only in state-run banks that offer piddling returns. Thus, the Chinese government — via the state banks — has access to loads of Chinese depositors’ money, too. Between central control of finance and the profligate nature of Chinese state-bank lending policy, there is little reason to expect any government bond auction to meet anything but robust demand.
A rate of 1.6 percent is hardly the kiss of death. Still, if there is one thing the Chinese government should not have trouble with, it would be redirecting its own ample resources to its own uses (for example, by having the state banks or the currency reserve managers bid on some of the debt in a manner similar to what Japanese institutions are forced to do). The lesson is that even Chinese government institutions would rather use their money in safer and more attractive pursuits (such as the near-zero rates that short-term U.S. Treasury bonds offer) than put it in an asset backed by the “full faith and credit” of the Chinese government.