World’s Fastest Growing Economy Fails to Sell Debt Paper
Ever tried to sell something on Craig’s List or E-Bay … a car, an old refrigerator, last year’s i-phone … and nobody called to make an offer?
There are an awful lot of people, our president included, who seem to believe that governments can borrow whatever money they want, whenever they want it. As China’s CaiXin media group reports, it doesn’t always work that way.
BEIJING ( Caixin Online ) — The Ministry of Finance failed to sell some of its three-year local-government bonds in its first auction so far in 2011, on a lukewarm response from the market to the bond issuance.
On July 11, the MOF launched an auction on behalf of local governments for 25.4 billion yuan ($3.93 billion) in five-year bonds and 25 billion yuan in three-year bonds. Yield rates were 3.84% and 3.93%, respectively. However, about 1.1 billion yuan worth three-year bonds failed to garner bids.
The MOF plans to sell 200 billion yuan in local-government bonds in 2011.
This is the first time the Ministry of Finance failed to auction off all of its local bonds. In addition, the yields are much higher than expected.
Make no mistake… for all it’s recently flexed economic power, China is still very much an autocratic socialist state. But even there, in a tightly controlled environment, like it or not, markets work.
Government bureaucrats, including Finance Ministers (and presidents) are themselves afflicted with the same entitlement mentality that they try so hard to foster in the rest of us. Their job is to “get things done,” and to do that they need money… other people’s money. But sometimes, that money simply isn’t available to them., as the governments of Portugal, Ireland, Italy, Spain, and of course Greece are now finding out the hard way.
Part of the reason that the recent financial crisis and resulting recession have been so severe is the fact that there was simply far too much leverage. And far too much of that debt was imprudent and unsustainable. Debt markets worldwide are correcting the excesses of the past and deleveraging. And though the Obama government seems not to have got the memo, the fact that China could not sell the debt it wanted to, even at a higher than expected interest rate, should serve as a warning.
We are still the United States of America, but we are not immune from economic and fiscal reality.