STIR: RBA Dated OIS Pricing Holding Its Post-RBA Softening

AUDUSD has held onto most of Friday’s 1.4% losses rising only 0.1% to 0.6592 during today’s APAC session. With equities selling off and commodities mixed, the move higher may be driven by market participants taking advantage of the low level following Friday’s move. The USD index is flat. 

• After outperforming at the end of last week, yen is underperforming today leaving AUDJPY up 0.5% to 100.95, close to the intraday high.
• AUDNZD is little changed up 0.1% to 1.1045. AUDEUR is 0.1% higher at 0.6147 and AUDGBP +0.1% to 0.5102.
• Equities are weaker with the ASX down 0.4% and Hang Seng -1.8% but the S&P e-mini is 0.2% higher. Oil prices are lower with WTI -0.3% to $70.16/bbl. Copper is up 0.4% though, while iron ore is down slightly at around $100-101/t.
• There are no data in the US or Europe with Veterans/Remembrance Day observed in a number of countries. ECB’s McCaul speaks later.

J.P. Morgan: "The MOF explained that total local government hidden debt outstanding was 14.3 trillion yuan at end-2023, and it will drop to 2.3 trillion yuan by end-2028 (the other 2 trillion yuan will be repaid after 2029 in addition to the 10 trillion yuan swap program). The MOF estimates that the swap program can reduce the interest burden by about 500bn yuan in the next five years, which can help mitigate fiscal stresses by local governments and free up resources to support growth.

The disappointing part in our view is that today’s press conference did not touch on the other important issues, such as fiscal support for housing de-stocking (or more broadly fiscal support for housing stabilization effort), increasing central government bond issuance for bank re-capitalization and consumption support. This is not a surprise as the NPC agenda released earlier this week already stated local government hidden debt swap was the focus of this meeting. Also, what is missing this time does not mean it will not happen, it is a work in progress (hence slower than market has anticipated). (1) For the housing de-stocking funding, the MOF has mentioned that some special local government bond will be used to support local governments’ purchase of housing inventory and idle land, though the number has not been specified. There is a risk that the proportion of special LGB to support housing de-stocking will be lower at 10-15% (instead of ~20% implied by the Reuters report) next year, which would suggest a further prolonged housing market correction. But we think the allocation can be flexible depending on the housing destocking progress and incentives for involved multiple parties (developers, local governments etc.), we think fiscal subsidy to increase asset returns can help address financial incentive constraints; (2) For the issuance of special central government bond to support major banks’ capital injection, Minister Lan did confirm ongoing accelerated efforts on this front. It might be delayed into 2025 as bank re-capitalization is not as urgent as other policy issues (e.g. local government hidden debt and housing stabilization); (3)There was also market speculation about additional consumption stimulus package (we have relatively low expectations on the size of consumption supportive measures), but little was mentioned at the press conference, except forward guidance on stepped-up efforts to support equipment upgrade and consumption trade-in next year, as well as efforts to improve social welfare; (4) 

In addition, the Finance Minister reiterated the policy room to lift budgetary fiscal deficit and increase ultra-long Treasury bond and special local government bond quota, which more likely will be decided in the December Central Economic Work Conference and announced in the March 2025 NPC meeting." 

HSBC: "The long-awaited details on China's fiscal package were finally unveiled at the conclusion of the NPC Standing Committee meeting on 8 November, but only partially. Today's press conference was solely about local government debt swaps.

For some, it's disappointing: i) markets had been anticipating for weeks, with the scale ranging from RMB6trn to over RMB10trn, covering local government debt swaps, recapitalisation of six state-owned banks, and direct support to consumption and housing market; ii) it may still sound like kicking the can down the road; without fiscal reforms to address the root cause of local government debt problems, it is. But both the Third Plenum and Mr. Lan said there will be reforms in the pipeline; iii) there is no upside surprise as swaps will be done via local government special bonds, instead of having the central government assume part of the local government debt (see Glass half full or half empty?, 17 October).

For others, it's indeed the largest scale of 'local government debt swap' in recent years, as promised by the Finance Minister, Mr. Lan Fo'an on 12 Oct (MoF press conference, 12 October). Counting all sources of funding, the 'magic number' of RMB12trn will save local governments RMB600bn in interest payments, reduce their hidden debt to RMB2.3trn over the next five years, and alleviate the liquidity crunch in the system as suppliers and other creditors get paid in the line.

Is it really a big deal? Depends on how we look at it. First of all, it's important to clarify local government hidden debt is not the same as local government financing vehicle (LGFV) debt. It is narrowed defined as "the debt incurred by local governments outside the statutory government debt budget, which is directly or committed to be repaid with fiscal funds, as well as debts incurred through illegal guarantees" (Zhongfa (2018), Circular 27). The hidden debt includes local government account payments, and we discussed in detail why settling local government arrears benefits the real economy (see Glass half full or half empty?, 17 October). It's revealed today that altogether the scale is RMB14.3trn as of end 2023, much smaller than the interest-bearing debt by LGFVs (cRMB60trn). From that sense, changing over 80% of hidden debt into local government special bonds is a big deal. Secondly, such swaps could help local governments re-prioritise economic growth.

What more to expect? Mr. Lan stated that there is still ample space to increased government bond issuance and/or fiscal deficits, and measures to directly support consumption and housing market are being studied and will be rolled out later. Maybe not this year, but certainly something to look forward to in March 2025 with the annual budget announced during the Two Sessions."