The Chinese local governments have shown more signs of cash shortage as they moved to Hong Kong’s bond market to raise money.

The Hong Kong Monetary Authority (HKMA) announced on October 24 that the Hainan Provincial Government would issue its offshore bonds in Hong Kong, amounting to no more than 5 billion yuan (nearly $700 million).

The bonds issued by Hainan Province include blue bonds and sustainable development bonds. Blue bonds are issued by local governments, development banks, or other institutions.

The HKMA said its Central Moneymarkets Unit would provide bond custody services.

On the same day, the HKMA also announced that the Shenzhen Municipal Government would issue the same amount of offshore bonds in Hong Kong.

This will be Shenzhen’s second bond issuance in Hong Kong after the first one conducted in 2021.

HKMA Director Yue Wai-man said that Hainan Province is the first mainland local government outside the Guangdong-Hong Kong-Macao Greater Bay Area to issue bonds in Hong Kong.

Yue said that Hainan and Shenzhen’s bond issuance would help strengthen Hong Kong’s position as a sustainable finance hub.

But in the views of experts, they believe that the local Chinese governments are financially tight, so they have begun to use Hong Kong to raise overseas funds, in addition to issuing bonds in the mainland. However, Hong Kong’s economic prospects are also grim.

Li Songjun is an economist who has been following China’s economy for a long time. He said that Hainan’s bond issuance in Hong Kong is mainly aimed at expanding financing channels and ease the province’s financial tensions.

She added that Hainan not only issued bonds in China but also issued offshore bonds for the first time, using the Hong Kong market to raise money abroad.

According to the Bank of China’s Research Institute, Hainan Province’s fiscal deficit increased 30% year-on-year in the first seven months of this year.

Only Shanghai had a fiscal surplus among China’s 31 provinces and cities during the same period, but it is 79.2% smaller than last year.

Hainan’s Department of Finance announced earlier that it planned to issue 13.3 billion yuan ($1.86 billion) of municipal bonds in October.

Li Songjun said that local finances are very tight this year, and governments at all levels face severe fiscal deficits.

Based on data released by the Ministry of Finance on October 25, Bloomberg calculated that China’s overall fiscal deficit hit 7.16 trillion yuan ($1 trillion) in the first nine months of 2022. It is almost three times higher than in the same period last year.

Under China’s strict zero-Covid policy, local governments had to increase spending during the pandemic. In addition, large-scale tax deductions, rebate policies, and shrinking land sales resulted in a huge gap in local finances.

Li Songjun said that while the Chinese government wants to maintain Hong Kong’s status as an international financial center, the city’s economic prospects are bleak.

She said that after the implementation of the Hong Kong version of the National Security Law, the city’s soft power as an international financial center has been greatly weakened.

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