China’s bond defaults may lead to poor places becoming poorer and rich places richer
- Local governments in underdeveloped parts of China could find it harder, or at least more expensive, to borrow money
- Supreme oversight body of China’s financial risks has urged local governments to honour debts, suggesting that Beijing has no intention of bailing them out
One consequence from recent defaults in China’s bond market is that there is likely to be an acceleration of money flowing from the country’s poor provinces into a handful of already affluent areas such as the Pearl River Delta and the Yangtze River Delta.
If the monetary displacement is large enough, it could result in regional polarisation in the world’s second-biggest economy, with the rich areas becoming richer and the poor places poorer – a situation that would have far-reaching implications and create serious challenges for Beijing’s centralised control of a vast economic landscape.
The supreme oversight body of China’s financial risks has urged local governments to honour their debts, suggesting that Beijing has no intention of bailing them out.
The impact on the psychology of bond investors should not be underestimated, as they now know they have to be more careful in the future. So, local governments in underdeveloped areas will find it harder, or at least more expensive, to borrow money.