China will unveil a host of new policies aimed at boosting growth in the next few weeks as the country tries to stimulate investment, according to James Kynge, author of the international bestseller "China Shakes the World".
He expects Beijing to cut the reserve requirement ratio (RRR) for commercial banks three times in the first half of the year. China last announced a cut to banks’ RRR by 0.5 percent on February 19. Kynge said Beijing could also launch a bailout of China’s banks by the capital markets.
"Local governments are feeling very pinched at the moment," he said. "In January we saw a very significant decline in local governments’ fiscal revenues year on year and also a very big decline in land sales."
Local governments "simply don’t have the money they did to spend on investment in the past three years," he said.
To tackle this problem, Beijing could launch the second phase of its local government finance vehicle (LGFV) bailout, according to Kynge.
The first phase began in September last year when banks were told to roll over their loans to LGFV’s.
"The second phase, in our view, will be when the banks themselves get bailed out - not by the government but by the capital markets," he said.
Kynge says the banks will issue bonds of repackaged LGFV debt.
"There is supposed to be about 2 trillion RMB [renminbi] in LGFV debt coming due this year. If 30 percent of that is bad that is 600 billion RMB. If you were to repackage that into bonds and reissue them on the bond markets the bond markets would easily handle that," he said.
Kynge thinks even a pilot scheme would make the market take a breather and demonstrate that the Chinese government is trying to sort out "its biggest red button issue".