Lo­cal govt sol­vency tested on debts due

China Daily (Canada) - - BUSINESS - By WEI TIAN in Shang­hai weitian@chi­nadaily.com.cn

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.

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