Chinese steel market unaffected by Beijing’s rollover of local govt debt

The Chinese government has allowed a rollover of local governments’ debts, a move that is seen to ensure that ongoing infrastructure projects are not left uncompleted due to lack of funds.

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The move however failed to give any support to the steel market, which continues to see a decline.

Beijing will consider giving permission to local governments’ financing vehicles facing tight cash flow to raise funds by issuing an appropriate number of new bonds to “borrow new and repay old”, the National Development & Reform Commission said on January 2.

The funds raised will ensure that projects will not end up half-completed, it added.

The move to allow the refinancing of debt with bonds is seen as a positive one as bonds were more transparent than loans, market participants said.

However, the news failed to lift sentiment in the steel market.

Rebar futures on the Shanghai Futures Exchange hit a seven-month low of 3,512 yuan ($575) per tonne on Monday January 6.

“Though local government debt has been the biggest risk for China’s economy in recent years, people are not that worried about it since everyone believes the central government would finally lend a hand to it. The move was not a surprise to the market,” a Shandong-based futures analyst said.

“Overcapacity in the steel market is too serious to react to the news. Many industries could benefit from the news, but at this early stage, not the steel sector,” a market observer in Shanghai said.

“Ongoing projects get to continue as a result of the policy, but its impact on the steel industry will not be equal to that of launch projects,” a Shanghai-based steel analyst said.

China’s National Audit Office (NAO) on December 30 announced that local government debt had reached $17.9 trillion yuan ($3 trillion) by the end of June 2013, an increase of 67% from the end of 2010. Nearly 40% of that debt matures by the end of 2014.

The announcement followed a nationwide audit on local government debt that started in August last year.

The NAO described the debt level as generally “under control’.

But Moody’s believes the local government debt will be a burden on and carry risks to the central government’s finances.

“Direct debt has grown beyond the capacity of many local governments to service it, and the central government may need to provide additional fiscal resources to local governments to bolster their finances and debt-repayment capacity,” the rating agency said in a release on Monday.

“But such a level is still manageable and future payment capabilities will be enhanced if China's GDP growth remains, in accordance with our central scenario, relatively strong at around 7% per year over the next five years,” it added.

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