Debt for Debt

Central to the directive is a bigger-than-expected plan by the People’s Bank of China that will let commercial banks use local-government bailout bonds they purchase as collateral for all kinds of low-cost loans from the central bank. The goal is to provide Chinese banks with more funds to make new loans. The directive was issued earlier this week to governments across the country and reviewed by The Wall Street Journal. 

The action marks the latest in a string of measures taken by Beijing to boost economic activity, including three interest-rate cuts since November. But those steps so far have failed to spur new demand, in part because heavily indebted Chinese companies and local governments are struggling with repaying mountains of debt. At the same time, borrowing costs remain high, and low inflation makes it difficult for businesses and consumers alike to service debt. Banks are reluctant to cut lending rates amid higher funding costs and rising defaults. 

Wei, Lingling. "Slowdown Spurs 'Extra Urgent' Stimulus Move." The Wall Street Journal., Thursday, May 14, 2015, A5, Accessed on May 14, 2015, http://www.wsj.com/articles/china-stimulus-aims-at-restructuring-trillions-in-local-government-debt-1431511027

There has been some bad news out of China recently. Whether it be slower GDP growth or ghost cities, it seems like the headlines out of the People's Republic are a bit more gloomy than they used to be. 

I can't help but recall that financial crises are typically triggered by widespread drops in asset prices, a run on the banks and significant currency drain. So far this doesn't look like that. Let's hope it never does.