Daily Management Review

Chinese regions debts are going off-balance


10/17/2018


Off-balance sheet debt of the Chinese regions in 2017 reached 37 trillion yuan ($ 5.5 trillion), or 45% of GDP, and this figure is significantly higher than the official debts of these issuers (16.5 trillion yuan), Standard & Poor's calculated. Such debt was issued through special financial structures associated with the regions (LGFV), and over the last decade it has grown by 20% per year - much faster than nominal GDP. The money raised first went to implementation of expensive infrastructure projects.



Mstyslav Chernov
Mstyslav Chernov
By itself, the level of pressure is not a key problem, but the ability to repay debts from different regions and their financial intermediaries varies - it does not always correspond to the load already taken and may threaten fiscal stability, although so far none of these structures have declared a default, point out S&P. Basically, such companies are involved in infrastructure projects and land development, while they have mandates for this activity from local authorities, and receive financial and administrative support from them. In total, the agency revealed 1350 LGFV, but these are only those companies that issued bonds in the domestic market of the PRC, which made financial information about them available.

In 2015, to reduce off-balance sheet debt, Beijing has already allowed regions to place their own bonds on the market. However, over three years, their volume amounted to only 3.4 trillion yuan, including 1.6 trillion yuan in 2017 -. By 2020, the placement may reach 4 trillion yuan, but this will not allow replacing the use of LGFV. Instead, the regions may partially reduce the burden on such structures by transferring to them the funds received from the placement of official bonds.

Now 60% of regional placements fall on bonds secured by income from project implementation, unlike the second type — securities secured by tax revenues — they are not taken into account when calculating the budget deficit. The first type of bonds can be the main source of new loans - given the support of the central government, the credit rating of these securities is close to sovereign debt, but the ability to transfer off-balance sheet burden is limited, as the regions have yet to refinance and previously issued liabilities, S&P concludes.

source: standardandpoors.com






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