Beijing may sanction local government debt defaults
POLICYMAKERS in China may allow some local governments’ debt to default next year to improve market discipline as borrowings surge, according to Nomura Holdings yesterday.
Local government financing vehicles’ debt grew 39% from 2010 to 19-trillion yuan (R31-trillion) as of the end of last year, Nomura economists led by Zhang Zhiwei wrote in yesterday’s report. That is 37% of gross domestic product, according to the investment bank. The estimate includes “interest-bearing debt such as bank loans and bonds”, as well as “noninterest-bearing debt”, the report said.
China will complete an audit of the debt this month to assess risks to its financial system, ahead of a Communist Party meeting in November to set economic policy. Nonperforming local-government and corporate liabilities will probably have a “significant impact” on China’s credit and economic growth, half of the economists polled in a July survey said.
“The central government may allow a number of individual credit defaults to take place to set examples to … the sector — and investors,” the report said.
Premier Li Keqiang said earlier this month that China was taking “targeted measures” to address the issue of localgovernment debt that “people are all concerned about”. The rising borrowings underscore the risks President Xi Jinping’s government faces as it tackles the effects to the financial system of a record credit boom.
Regional governments set up more than 10,000 local government financing vehicles to fund the construction of roads, sewage plants and subways after they were barred from directly issuing bonds under a 1994 budget law. A 4-trillion yuan stimulus plan during the 2008-09 financial crisis swelled loans to companies, which they have been rolling over or refinancing with new note sales. The financing vehicles may hold more than 20-trillion yuan of debt, former finance minister Xiang Huaicheng said in April.
The reliance of the financing vehicles on land sales and rising land prices to repay debt creates “many problems”, People’s Bank of China governor Zhou Xiaochuan wrote on the central bank’s website early this month.
Mr Zhang said yesterday that defaults are more likely to occur in so-called shadow-banking activities, such as trust businesses, than in the bond market. That was because any nonpayment in the latter would affect retail investors and become a high-profile issue.