China’s government needed lower borrowing costs to clean up a local debt mess. The central bank obliged.
The three-month Shanghai Interbank Offered Rate has tumbled 200 basis points since March 31, heading for the biggest two-month drop since 2008. That coincides with the government kicking off a municipal bond program and the exchange of regional loans into lower-yielding notes. Jiangsu province and Xinjiang autonomous region both sold three-year debt for less than 3 percent last week, almost matching the sovereign, after the start of issuance was delayed in April.
Central bank Governor Zhou Xiaochuan has accelerated monetary easing just as local authorities kick off more than 1.77 trillion yuan ($286 billion) of bond issuances, a four-fold jump from 2014. Banks are the biggest buyers of government debt and will have more appetite for the securities as loan rates decline. Local-government obligations may have reached 25 trillion yuan, more than the size of Germany’s economy, Mizuho Securities Asia Ltd. estimates.