First, a handy graphic from the note highlighted today.
The Working Paper from the IMF raked over this morning sent me a long way down memory lane and, as this is my blog, you’ll have to allow the reminiscence.
My first job was working as the assistant to the money manager of an insurance company in the U.K. Balances were collected daily from regional offices and aggregated surplus funds were placed on short term deposit in the money market. For my then boss this was a tiresome function so I was soon trusted to have a go.
Banks were usually stingy payers for short term funds so we would often ask the money brokers if any local authorities were in the market for one or perhaps two-week funds? If they were the next question would be on counterparty.
Here’s the point of my story. Over 30-years ago in the U.K. (and for a long time before that I’ve no doubt) the most junior operator(s) in the money market was/were were making qualitative counterparty distinctions among local authorities.
Compare this with China today where, according to IMF researchers W. Raphael Lam and Jingsen Wang, local governments all get AAA-ratings and lenders make no qualitative distinction between them. This is understandable as the local authority bond market, the subject of the note, didn’t exist much before 2014; but to become of real use it needs to get a lot better than it is today.
The paper notes the following shortcomings:
Undeveloped market discipline (the point above about lack of distinction)
A fragmented regulatory framework
Lack of disclosure [Er, welcome to China peeps. Ed]
Limited debt management capacity at the local level
This being a paper from the IMF they have some ideas about how to improve things. Such as?
Improve liquidity and broaden the investor base (most bonds don’t trade after issuance)
Tighten [Further] off-budget borrowing, there’s still too much in the shadows
Harmonize regulation and taxation
Improve disclosure (prospectuses are flimsy, 10~12-pages as a rule)
Clarify the resolution framework, and
Approach debt management more holistically
The prescription is simple, but its implementation will take time. China moves quickly though so it may not be too long before money managers begin making a distinction between the price of funds to Gansu versus Guangdong in the same way, many years ago, I was making the distinction between Kyle-and-Carrick and Tower Hamlets?
You can access the report in full via the following link China’s Local Government Bond Market.
Happy Sunday