Default fears have driven central and local government officials into critical negotiations with banks over proposed payback adjustments for trillions of yuan in outstanding debt.
The negotiators are focusing on an estimated 1.8 trillion yuan ($286 billion) in loans to local government financing platforms scheduled to mature in 2012.
They’re also keeping an eye on the rest of what may be more than 10 trillion yuan in outstanding debt issued to local governments for infrastructure construction and other big-ticket projects in recent years.
According to the most recent figures from the National Audit Office, local government financing platforms owed 10.7 trillion yuan at the end of 2010. Of that amount, loans worth about 2.6 trillion yuan came due last year, although it’s unclear how much — if any — of that was repaid.
Banks are being asked to rejigger repayment schedules and let borrowers settle maturing debt with fresh loans under a risk-mitigation plan drafted by the central government, Caixin has learned. Details have yet to be released.
Loan adjustments would help local governments buy time while they wait for a fresh gust of economic growth to pump up fiscal revenues.
Without adjustments, repaying near-term loans may prove impossible for local governments whose revenue sources have been drying up. A slowing real estate market last year bit into government land sales, for example, and tax receipts have slid in parts of the country hit by slowing exports.
An official at one branch of a state-owned bank told Caixin that since early last year banking regulators have been expecting at least some financing platforms to default on loans.
So far, no major defaults have been reported. Negotiators promoting debt repayment adjustments say bankers can prevent defaults now by working with local government borrowers.
In addition, they say, bankers willing to restructure loans can help provinces, cities and other communities complete infrastructure projects launched with borrowed money as part of China’s stimulus response to the 2008 global financial crisis.
Borrowing blocks
The China Banking Regulatory Commission set the stage for debt adjustments late last year when it ordered financing platforms and their banks to carefully review debt contracts tied to building projects.
They are to be closely considered when banks set interest rates for renegotiated and extended loans. And after a project is complete, the regulator said, debt should be serviced every six months.
“Some projects have been completed, and the extension may be shorter, said Fan Jianping, director and chief economist at the State Information Center’s Economic Forecast Department. “Some projects are under construction and have ongoing funding requirements, and the extension may be longer.”
Moreover, Fan said, loan collateral must be re-evaluated during an adjustment process, since collateral security affects a loan’s quality.
Zhao Quanhou, director of the Finance Research Office at the Fiscal Science Institute, which is under the Ministry of Finance, said he opposes loan extensions in theory, calling each “essentially a default.”
Zhao admits extensions are necessary “if short-term monetary policy cannot be relaxed. But if they are done often, they will destroy rules of the market.”
It’s better, Zhao said, for borrowers to repay old loans with money from new loans. “Borrowing new money from the original bank to repay the old loan and changing the term structure makes for a new loan,” he said. “It’s a makeshift solution, not a default.”
The bank source said payback schedules and other terms for new loans may be more stringent than any original loan structure. Fresh borrowing under these conditions generally falls short of what’s already owed by 10%.
In some cases, a financing platform may borrow from one bank to repay loans issued by another. Small banks may be tapped in the second round of borrowing since major banks may not allow the practice.
As loan negotiations continue, local governments are expected to seek other financing channels, such as bonds.
Indeed, local government financing platforms are optimistic about raising money this year through bond projects. As of mid-February, for example, more than 20 platforms had issued or announced plans to issue bonds through the Ministry of Finance.
An expert close to the ministry said a pilot program that lets local governments issue municipal bonds directly may be expanded to more than a dozen provinces and municipalities, mainly in the country’s east. The program now covers four communities: Shanghai and Shenzhen cities and Guangdong and Zhejiang Provinces.
The expert also suggested local governments raise funds from private sources and consider selling assets to private investors.
Liu Yuhui of the Chinese Academy of Social Sciences Institute of Finance suggested the central government consider promoting asset securitization for banks. Many local financing platform projects such as tollways, he said, generate healthy cash flow after completed and are suitable for asset securitization.
At the same time, local governments are being encouraged to improve internal debt management.
Fan said real-time tracking of all debt, including bank loans and bonds, should be included in local government debt monitoring.
At regional meetings of the National People’s Congress and People’s Political Consultative Conference, delegates learned that provincial governments in Fujian and Zhejiang as well as the municipal government in Shanghai have proposed revamping debt-tracking systems in 2012.
In addition, governments in Shanghai and Heilongjiang Province are among several nationwide that plan to earmark some 2011 surplus revenues toward repaying debt.
Experts say there’s plenty of room for bond financing, since according to the National Audit Office bank loans comprised 79% of the local government debt in 2010.
Fan said bond financing is easily managed and more transparent than bank lending. “The market can vote on government investment with its feet,” he said.
Zhao cautions, however, that local governments must exercise fiscal discipline before being allowed to directly issue bonds.
