Tags: china | local government | borrowing | asia

China Said to Ready Plans to Buoy Local Government Borrowing

Tuesday, 19 May 2015 07:58 AM

China is considering relaxing rules for bond sales in a bid to boost slowing economic growth, people familiar with the matter said Tuesday.

After two years of telling local authorities not to take kickbacks and don’t borrow too much, President Xi Jinping’s national government is tweaking the missive. With the economy undershooting its 7 percent growth target, the admonition against borrowing is being wound back, at least in part.

China’s economic planning agency, the National Development and Reform Commission, is now seeking opinions on a draft proposal that would change rules on the bond sales it regulates in order to help investment funding, the people familiar said, asking not to be identified because the details are private. Xi and Premier Li Keqiang’s crackdown on the old, debt-fueled model of unrestrained growth have gummed up stimulus mechanisms, and restrictions on off-balance sheet financing vehicles are being relaxed.

“The government is running out of choices — investment is weak not only in the property market but also in infrastructure, and the government has to do something,” Yao Wei, a Paris-based China economist at Societe Generale SA, said. While allowing local government financing vehicles to sell more bonds and telling banks to lend money to them aren’t “in line with China’s long-term reform goals, it’s necessary to address short term slowdown problems.”

Favored Projects

The NDRC proposals include lowering the required debt-to- asset ratio and canceling limits on the number of note sales if proceeds are for projects approved by the government. Those favored projects need to be backed by AA+ credit guarantee firms or supported by sufficient collateral to be AA+ rated or better, according to the people.

Favored developments include investment in seven key industries, namely oil and gas pipelines, health, clean energy, transportation and mining, as well as facilities for older people, underground pipelines and cable networks and parking facilities.

The NDRC didn’t immediately respond to faxed questions seeking comment.

The relaxation will also make it easier for local government financing vehicles, or LGFVs as they are more commonly known, to sell bonds. It’s proposed the mix of debt in relation to assets be relaxed to 65 percent, and 75 percent for AAA-rated bonds, the people familiar said.

‘Ultimate Concern’

According to the proposals, outstanding debt in the form of enterprise bonds and medium-term commercial paper of a county or a municipal city can be as much as 12 percent of local gross domestic product, from the previous 8 percent.

“The labour market is Beijing’s ultimate concern due to its social impact and potential threat to the stability of the political establishment,” said Chi Lo, a senior strategist on China at BNP Paribas Investment Partners in Hong Kong. “Beijing is shifting towards more easing, albeit still cautiously, to preempt this potential risk stemming from further weakness in the labour market.”

A purchasing managers index for manufacturing employment showed jobs were in contraction zone in April, and a similar gauge for services showed service jobs dropped to six-month low.

China’s local-government obligations may have already reached 25 trillion yuan ($4 trillion), bigger than the size of the German economy, according to estimates from Mizuho Securities Asia Ltd. That compares with the figure of 17.9 trillion yuan as of June 30, 2013 given by the National Audit Office.

‘Getting Nervous’

LGFVs were set up in the thousands in China to fund infrastructure projects after a 1994 law banned regional authorities from issuing bonds directly. Some have turned to the dollar bond market amid the onshore funding crackdown.

“It clearly shows Beijing is getting nervous about the slowdown,” said Chen Long, a Beijing-based China economist at research consultancy Gavekal Dragonomics. “But I don’t think these are signs of big stimulus, they just want to make sure that the slowdown is not very sharp.”

China’s economy remained sluggish at the start of the second quarter, suggesting policy makers’ steps to free up more funds for lending haven’t been enough. The country had two landmark debt failures in April when Baoding Tianwei Group Co. became the first state-owned firm to renege on onshore notes and Kaisa Group Holdings Ltd. became the first developer to default on dollar-denominated securities.

Infrastructure Spending

China is accelerating some 300 infrastructure projects, which are to be overseen by the NDRC, valued at 7 trillion yuan this year, other people familiar with the matter said in January. Projects will be funded by the central and local governments, state-owned firms, loans and the private sector, they said.

Authorities in China are trying to find ways to stimulate growth without drastically increasing leverage and sparking more defaults. Home-purchase rules have been eased and interest rates have been cut three times since November.

According to McKinsey & Co., by the middle of 2014, China’s total debt had reached 282 percent of GDP.

“The government had tried to reduce debt and to maintain growth at the same time, but it seems you can’t achieve both, you have to choose one,” Societe Generale’s Yao said. “The relaxation will help the economy to stabilize, but not necessarily cause a sharp rebound.”

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China is considering relaxing rules for bond sales in a bid to boost slowing economic growth, people familiar with the matter said Tuesday.
china, local government, borrowing, asia
Tuesday, 19 May 2015 07:58 AM
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