Local govt solvency tested on debts due
The solvency of China’s local governments is being tested as they pull out all the stops to meet the payment deadline for their heavy borrowings over the last several years.
Because it has become a more challenging task for local officials facing slowing fiscal revenue growth, more market forces, such as equity transfer and assets securitization, could be introduced to help tackle the issue, analysts said.
A comprehensive survey of local governments by the National Audit Office revealed that direct and indirect debt of local governments amounted to 17.9 trillion yuan ($2.94 trillion) as of June 2013, up from 10.7 trillion yuan at the end of 2010. It was equal to 32 percent of the country’s gross domestic product that year.
Of the trillions of yuan borrowings of which local governments are responsible for repayment, Jiangsu province in East China has the heaviest liabilities at 763.6 billion yuan, an audit of local government’s checkbooks showed.
Nearly 22 percent of the government debt will mature in 2014, according to the audit office survey. Experts estimate the interest alone will total 1.6 trillion yuan.
Among first-tier cities, Beijing will have 194 billion yuan of debt due for repayment in 2014, while Shanghai will have to raise 220 billion yuan for debt repayment. Guangzhou faces 50 billion yuan.
However, fiscal income, which used to be the major source of government’s debt payment, may not be able to cover what is owed as local governments lower revenue growth targets.
According to the Ministry of Finance, local government revenue grew 12.9 percent in 2013 to 6.9 trillion yuan. But most of the local governments have set this year’s growth target in their draft budget plan at around 10 percent.
Land sales revenue, which is another major part of government revenue, may also be inadequate for debt repayments because the housing market is expected to cool down from a period of rapid expansion over the past few years.
Zhang Bin, an expert on tax research with the Chinese Academy of Social Sciences, said only 20 percent of the 4 trillion yuan of income from land sales in 2013 — 800 billion yuan — was at the disposal of local governments. That sum could only cover half of the interest generated by the government debt.
The central government’s annual economic working conference in December underlined the control of local government’s debt risk as one of the six major tasks for this year. Experts are calling for additional methods for solving the debt issue.
Liu Shangxi, deputy head of the Fiscal Science Research Institute with the Finance Ministry, said equity transfers from State-owned enterprises would be a way of repaying matured debt.
Local government’s annual work reports have also made other arrangements, such as using reserve funds and bond issuances, to counter the possible risk of debt default.
The government in Guangzhou said it would liquidize some of its high-quality assets and increase its revenue from Stateowned enterprises in the hope that 60 percent of the city’s existing liabilities will be resolved by 2016.
Lian Ping, chief economist at the Bank of Communications, said local government financing vehicles are widely criticized for low transparency and unsustainability. He suggested a government debt market should be established to facilitate independent debt issuance by local governments.
“A well-operated securitization market could contribute to funding diversification and facilitate economic reforms and development in China in the near future,” said Vera Chaplin, a credit analyst with Standard & Poor’s Ratings Services.
To this end, China will need to build experience, gain economies of scale to derive cost effectiveness and build investor confidence, including that of offshore investors, according to Chaplin.
Moreover, it could take time for China to build a significant securitization infrastructure, such as a comprehensive legal framework and procedures, transparency of origin standards and validation, availability of reliable asset performance history and servicing practice, the establishment of third-party engagement practice and proper information disclosure, she said.