Lo­cal gov­ern­ment debt is­suance ac­cel­er­ates

China Daily European Weekly - - Business - By ZHOU LANXU and CHEN JIA Con­tact the writ­ers at [email protected]­nadaily.com.cn

Chi­nese lo­cal gov­ern­ments is­sued debt worth 378.89 bil­lion yuan ($55 bil­lion; 47 bil­lion euros; £42 bil­lion) in the week of Sept 16 to 22, a record high, ac­cord­ing to data from fi­nan­cial in­for­ma­tion ser­vice Wind Info.

This came af­ter a surge in lo­cal gov­ern­ment debt is­suance in Au­gust and July, the Min­istry of Fi­nance said on Sept 21. The coun­try is­sued lo­cal gov­ern­ment bonds worth 883 bil­lion yuan in Au­gust and 757 bil­lion yuan in July, with the two-month ag­gre­gate ex­ceed­ing the 1.41 tril­lion yuan in the first six months of the year.

The ac­cel­er­ated is­suance in lo­cal gov­ern­ment debt was mainly due to spe­cial-pur­pose bonds — debts fi­nanc­ing spe­cific pub­lic-in­ter­est projects. Au­gust saw the is­suance of 428.75 bil­lion yuan worth of spe­cialpur­pose bonds for new projects, a jump of 293 per­cent month-on­month and 217 per­cent year-onyear, ac­cord­ing to the min­istry.

The newly is­sued spe­cial-pur­pose bonds, mainly for in­fras­truc­ture con­struc­tion projects, could prompt fol­lowup in­fras­truc­ture in­vest­ment and credit ex­pan­sion, in­ject­ing mo­men­tum into the econ­omy, ac­cord­ing to a re­port by Guo­tai Ju­nan Se­cu­ri­ties Co Ltd on Sept 20.

The re­port ex­pected that the stim­u­lus to in­vest­ment will take ef­fect in the fourth quar­ter, ad­dress­ing the slack­en­ing growth in in­fras­truc­ture in­vest­ment of 4.2 per­cent year-on-year in the first half.

De­spite the tremen­dous in­crea­sis­sued es in lo­cal gov­ern­ment debt, the to­tal has been well within this year’s up­per is­suance limit set by the na­tion’s top leg­isla­tive body. Spe­cial-pur­pose bonds worth about 570 bil­lion yuan may be is­sued in Septem­ber and 270 bil­lion yuan in Oc­to­ber, the re­port pre­dicted.

“Gov­ern­ment in­vest­ment in in­fras­truc­ture projects could at­tract fol­lowup pri­vate in­vest­ments by giv­ing in­vestors the ex­pec­ta­tion of bet­ter op­er­a­tional sus­tain­abil­ity and credit en­dorse­ment,” says Zeng Kanghua, a pub­lic fi­nance pro­fes­sor at Cen­tral Uni­ver­sity of Fi­nance and Eco­nom­ics.

“The to­tal amount of lo­cal gov­ern­ment debt is cur­rently af­ford­able, mean­ing re­lated sys­temic risks are un­likely to oc­cur,” Zeng adds.

In or­der to avoid re­gional dif­fi­cul­ties in re­pay­ing gov­ern­ment debt, the ef­fi­ciency of project in­vest­ment in boost­ing lo­cal economies is im­por­tant, he says. “This is be­cause the debts can be re­paid by rev­enue gen­er­ated by the projects, such as high­way charges as well as in­creased fis­cal rev­enue ac­com­pa­nied by higher eco­nomic growth.”

Ap­prox­i­mately 70 per­cent of the value of spe­cial-pur­pose bonds in Jan­uary-Au­gust were “project in­come debts”, whose prin­ci­pal and in­ter­est are re­paid only by in­come gen­er­ated by the projects, ac­cord­ing to the re­port from Guo­tai Ju­nan Se­cu­ri­ties.

Re­pay­ment risks have been fur­ther con­trolled un­der this struc­ture, since sources of re­pay­ment are planned and spec­i­fied in ad­vance, Zeng says.

The re­port also said that “project in­come debts” have in­vested in new tar­get ar­eas this year, such as en­vi­ron­men­tal pro­tec­tion, med­i­cal care and wa­ter util­i­ties. For in­stance, South­west China’s Yun­nan prov­ince is­sued a debt of 1.9 bil­lion yuan this year to solve the eco­log­i­cal de­te­ri­o­ra­tion of its lakes and wet­lands. This trend is in line with the coun­try’s proac­tive fis­cal poli­cies to ad­dress weak links and boost the real econ­omy.

Chi­nese pro­vin­cial-level lo­cal gov­ern­ments is­sued 1.41 tril­lion yuan worth of bonds in the first half, 24.2 per­cent be­low the level recorded in the first half of 2017. Among the to­tal amount, 76.4 per­cent were swap bonds (is­sued to re­fi­nance legacy debt) and re­fund­ing bonds (is­sued to re­fi­nance out­stand­ing bonds).

“This low is­suance is be­cause of sea­son­al­ity and a re­duced need for swap bonds, be­cause most of the legacy debt had al­ready been swapped in the pre­vi­ous three years. How­ever, we ex­pect is­suance to in­crease dur­ing the rest of 2018,” says Daisy Zhang, an an­a­lyst with Moody’s.


A worker at a bridge con­struc­tion site in Guiyang, the cap­i­tal of Guizhou prov­ince.

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