(Bloomberg) — China is betting that a pickup in infrastructure spending can spur investment and cushion a property-led slowdown which has dragged economic growth down to almost its lowest pace in more than three decades.
But because the property curbs are hitting government revenue from selling land, Beijing will need to ease its tough campaign to crack down on “hidden” local government debt if it wants a long-lasting revival in infrastructure spending.
Premier Li Keqiang last month urged local governments to make better use of the proceeds from the sale of 3.65 trillion yuan ($573 billion) in “special” bonds to counteract “downward pressure” on the economy. The bonds are used to fund specific projects rather than general expenditures and regional authorities have almost completed the sale of this year’s quota.
The quota could be expanded to 4 trillion yuan next year, according to state media reports, but even that amount of funding would be small relative to China’s total infrastructure spending needs. Bloomberg Economics estimates infrastructure investment will reach about 23 trillion yuan in 2021, which implies special bonds can only around 16% of that expenditure.
The remainder is mainly paid for with money from land sales and local government financing vehicles, which are companies set up by local governments to raise debt from loans and bond sales and then keep that borrowing off of government balance sheets. Both those sources of financing are under strain from property sector curbs and a campaign against “financial risks.”
Those financing vehicles raised less money in 2021 as Beijing ordered local governments to cut their “hidden” off-balance sheet debt. LGFV’s net local bond issuance — the excess of newly sold bonds over repayments — in the first 11 months of the year was 1.95 trillion yuan, down from 2.19 trillion yuan in the same period last year, according to Bloomberg estimates.
The platforms have found it harder than in the past to obtain loans from banks and from non-bank “shadow” financing because Beijing has been shrinking the shadow finance sector as part of its financial de-risking effort. They have also raised less from foreign investors: LGFV’s net issuance of dollar-denominated bonds through the end of last month more than halved to $5.7 billion.
The property crackdown is also reducing local government’s sales of land to property developers, a major source of funds for local government investment. Infrastructure spending growth has moved almost exactly in line with land sales revenue growth in recent years, according to analysis from Goldman Sachs Group Inc., while the correlation with special bond and LGFV bond issuance is less significant.
Beijing’s efforts to slow the real estate market began cutting into land sales volumes and prices this summer. Local government income from land sales shrank by more than 10% year-on-year in August, September and October, the largest and most sustained decline since 2015, according to Wei He, an analyst at Gavekal Dragonomics.
In the first 10 months of the year, infrastructure investment rose just 1% compared with the same period a year earlier, leaving local governments with unspent funds.
“The positive factors such as money that hasn’t been spent this year will be countered by the negative impact from land sales,” He said. “Therefore I do not expect a significant acceleration in infrastructure spending to materialize next year.”
To be sure, “special” bond issuance has been concentrated at the end of this year, which could translate into a slight pick-up in infrastructure spending in the first half of 2022 if the funds are quickly put to use. But local governments have been struggling to find suitable projects to fund with special bonds whose conditions stipulate that investments must generate enough income to repay the bond principal and interest.
Local governments’ land sale revenue could fall 10% year-on-year in 2022, according to Gavekal’s He. That means if Beijing really wants infrastructure investment to increase, it will need to loosen the constraints on LGFVs, compromising on its goal to control debt-levels in the economy.
“If the economy softens in 2022 and the government needs to increase infrastructure spending to support economic growth, there would be easing in financing for LGFVs,” said Ivan Chung, associate managing director at Moody’s Investors Service in Hong Kong.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
