What Role Can Blended Finance Play in Fiscal Terms?


CAFI and Caixin Media hosted a special media dinner during the International Forum for China Financial Inclusion 2023. At the dinner, Huawei Ling, Managing Editor of Caixin Weekly, shared views on building a new financial ecosystem and defusing local government debt risks. Doguang Bei, President of CAFI and other guests also provided insights on inclusive finance and the new financial ecosystem.

Text of Sharing by Duoguang Bei as Follows

In our research, we found that when implementing the national strategy of rural revitalization, some local governments, namely county governments, simply lack funds. This is an issue related to the local government debts. Financially, assuming these debts have a maturity of 20 to 30 years, it allows us to postpone addressing this issue. Our municipal bonds and local debts are primarily used for public projects, but their maturity is shorter when compared to those in developed countries. Therefore, we need to adjust the maturity structure.


The interest rate is another problem, but it may not be the biggest one. Drawing on my experience in investment banking, these bonds are high-yield bonds, which can yield more than ten percent interest. Such high yield makes them good assets for rural commercial banks in China.


When I was at JP Morgan, I noticed that it was most keen on venturing into China for the high-yield bond market, as it presented lucrative opportunities. Of course, the precondition was that China would sustain high economic growth, ensuring consistent payments for the interests. However, unforeseen economic challenges, including a downturn in the real economy, have led to a continuous decline in recent years. While fiscal discipline may contribute to this decline, the primary cause is undoubtedly the economy itself. Logically, the fundamental solution lies in reviving the economy. Otherwise, piecemeal approaches can only be palliative.


In the context of rural revitalization, I learned from recent international exchanges a new concept of “Blended Finance.” For example, the government of Indonesia launched the Global Blended Finance Alliance at the G20 Bali Summit in November 2022. So, what is Blended Finance? It is the use of catalytic capital from public and philanthropic sources to mobilize additional private sector investment. Reportedly it has achieved a leverage ratio of 1 to 6. Indonesia noted China’s PPP practice is similar, in which the government plays a crucial role.

So, I gave it some thought and I think it’s the right time to introduce this novel concept, especially given the local financial constraint for rural revitalization. This is indeed an interesting idea. Guided by this concept, governments won’t implement “helicopter money” as they did before, as they are out of funds. So, the government needs to think about leveraging private investment. This may be a priority for us in the future.

And how to mobilize private investments? On the one hand, local finances are already in deficit; on the other hand, the banking system is holding trillions of yuan in deposits from the public, not knowing what to do with it. In other words, if there were no local government debts, many financial institutions, including banks, insurance companies, and asset managers would not know how to use these funds other than putting them in banks. So, we do have funds and China is actually the largest capital exporter. We financial professionals are thinking about how to channel these funds via blended finance. To support fiscal goals, financial innovation is essential. I believe we need to open the capital market, as the market will naturally find the best products and an open market brings opportunities to private capital. I do believe that the prospects are promising, as China still holds high savings rates, which represents our best resources.