A draft document circulated by the Ministry of Finance on local government debt proposes letting local governments issue bonds to replace borrowings taken through local government financing vehicles (LGFV). This would require a massive expansion of China’s fledgling municipal bond market. Regulators are struggling to manage a massive USD3 trillion of outstanding local government debt, much of it raised by LGFVs to finance infrastructure and real estate projects. This month, Beijing cut local governments’ ability to use LGFVs for future fundraising, as these have been criticized for facilitating irresponsible borrowing and investment that now is a drag on growth. Two people with direct knowledge of the draft document said the central government wants to precisely measure the amount of local government debt currently outstanding, classify it, and assign responsibility for it to appropriate government bodies. The Ministry of Finance declined to comment on the draft, which has been distributed to officials to seek opinions. Formal rules are expected to be published in a few months. China’s current quota for the municipal bond market remains extremely small at CNY109.2 billion for all of 2014.

The use of the yuan in cross-border trade and investment has grown rapidly in the past five years, according to Hu Xiaolian, Deputy Governor of the People’s Bank of China (PBOC). International renminbi settlement had exceeded CNY4.8 trillion by the end of September this year, up from CNY3.58 billion in 2009. Yuan payments between China and 174 countries now account for nearly one quarter of China’s total international payments, which has helped the Chinese currency become the second most used for such payments after the U.S. dollar. More than 15% of imports and exports were also settled in yuan. The Industrial and Commercial Bank of China’s cross-border yuan business has grown by an average of more than 200% annually since China launched its pilot program to settle more cross-border trade in yuan in 2009. The PBOC had now signed bilateral currency swap agreements worth almost CNY2.9 trillion with 26 central banks and monetary authorities, including the setting up of clearing houses for yuan-denominated transactions in Hong Kong, Singapore, London and Frankfurt. The renminbi is now directly tradable with the U.S. dollar, the euro, yen, pound, Russian rouble, Malaysian ringgit, Australian dollar and New Zealand dollar.

21 Asian nations signed a memorandum of understanding (MOU) in the Great Hall of the People in Beijing to create a new international bank. The Asian Infrastructure Investment Bank (AIIB) – with an initial capital of USD50 billion, to be expanded to USD100 billion – aims to fund the construction of roads, railways, power plants and telecommunications networks. Beijing will be the host city for the AIIB’s headquarters. It is expected that the AIIB will be formally established by the end of 2015. Chinese President Xi Jinping proposed the bank a year ago at a gathering of Asia-Pacific nations. China has said it will provide most if not all of the initial USD50 billion in capital. Private institutional lenders are expected to provide another USD50 billion. The Asian Development Bank (ADB) estimates developing Asian countries will need to invest USD8 trillion in infrastructure from 2010 to 2020 just to keep their economies moving forward, only a tiny fraction of which can be provided by the ADB. President Xi said that all countries with interest are welcome to join the bank. But major economies including Australia, South Korea and Indonesia were absent from the signing. China also is backing another USD50 billion-lending institution, the New Development Bank, sponsored by the BRICS countries.

Companies from the United Kingdom showcased more than 40 investment opportunities in a variety of sectors to Chinese investors at the China Outbound Conference 2014 in Beijing last week. The conference, organized by the China-Britain Business Council, focused on investments in such sectors as infrastructure and property, advanced technology and retail. Zhou Xiaoming, Minister Counselor of the Chinese Embassy in London, said that cumulative investment by Chinese companies in the UK has reached nearly USD40 billion – twice as much as UK investment in China – making the UK the largest recipient of Chinese investment in the EU. “The first seven months of this year saw a surge of Chinese investment. Chinese companies carried out nine major mergers and acquisitions (M&As). With a total investment of more than USD5 billion, they have invested more than they did in the whole of 2013,” Zhou said. In 2013, China’s outbound direct investment (ODI) reached a record high of USD108 billion. ODI reached USD74.96 billion for the first nine months of this year, up 21.6% year-on-year, and the upward trend is set to continue. The Ministry of Commerce (MOFCOM) estimates China’s ODI will exceed inbound investment in 2015, the China Daily reports.

Shanghai’s foreign direct investment (FDI) in September surged 44.6% from a year earlier to USD2.7 billion. “Shanghai continues to stand at the frontline of attracting foreign investment,” said Xue Jun, Analyst with CITIC Securities Co. “With the boost from projects in the pilot free trade zone and the Disneyland park, Shanghai has seen a big increase in its foreign direct investment last month.” Comparatively, China’s inbound foreign investment rose just 1.9% last month. In the first three quarters, Shanghai drew USD15.2 billion in foreign investment, up 12.9% year-on-year. In the same period, the country’s FDI fell 1.4%. As Shanghai aims to build itself into a global financial and shipping hub, the city’s services sector recorded a 132% surge in FDI of USD2.5 billion in September. The manufacturing sector drew USD284 million in investment, up 20.5%. Shanghai’s pilot free trade zone (FTZ) has also become attractive to foreign investors after operating for a year. As of mid-September, 1,677 foreign-funded companies were set up in the FTZ, accounting for nearly half of the city’s total.