Photo: flickr: Mckaysavage
China already has massive local government debt.But they still want to finance infrastructure projects in rural areas, so inside sources have told Shanghai Daily that the central government is drawing up plans to allow local governments to issue bonds. Temporarily. On a trial basis.
See, bond-holders have been getting suspicious of these so-called local government funding platforms (LGFPs). Investment bonds tend to be hard to track in China to the point where investors don’t know what they’re holding. And, a lot of these projects are in danger of being underused when done. That means they don’t generate a profit and then…default. That is what authorities are desperately trying to avoid with these new bond issuance’s.
“To avoid a bank default, we believe the authorities need to take decisive action to restructure local debt,” Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, wrote in a report dated Monday. “We see the issuance of municipal bonds as the best option.”
The government has already repackaged 2.1 trillion yuan of local government debt as corporate debt so that borrowing can continue. Even still, local government liabilities are at whopping 7.1 trillion yuan ($1.1 billion). At the end of 2010 LGFP’s had 10.7 trillion yuan in outstanding liabilities, 8.5 trillion of which was in the form of bank loans.
The management of some of these companies was “irregular” and their ability to repay debt is weak, auditor-general Liu Jiayi said at the end of last year. The vehicles had more than 8 trillion yuan in debt overdue, he said.
So these new bonds will just add more to the pile. Let’s see how it all shakes out.