China debt: Beijing offers support to indebted Guizhou to ensure cash flow, boost investor confidence

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China will allow one of its most indebted and poorest provinces to delay debt payments and undergo a restructuring process amid growing concerns that a crisis could break out in the southwestern region that is synonymous with the popular Mao-tai liquor.

The mountainous landlocked province of Guizhou in southwest China, which has a population of over 38 million, has struggled to raise funds in the capital markets in recent years as a result of its deteriorating credit profile.

Guizhou has also not released the total debt levels of its local government financing vehicles (LGFVs) – the go-to platforms for local authorities to seek off-balance borrowing.

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But since 2018, the province has defaulted on at least 68 debt products, which would be the most of all of China’s 31 provinces, according to Tianfeng Securities last week.

An appropriate allocation of new local government debt limits will be assigned to Guizhou to support the construction of eligible government investment project

State Council

“For qualified outstanding hidden debt obligations, China will allow local financing platforms to negotiate with financial institutions to appropriately extend repayment and undergo debt restructuring to maintain cash flow,” the State Council said on Wednesday as it outlined plans to support the growth of Guizhou’s economy.

“Under the premise of ensuring that the debt risks are controllable, an appropriate allocation of new local government debt limits will be assigned to Guizhou to support the construction of eligible government investment projects.

“[There will be] research that supports the pilot programme of reducing debt risk levels in some high-risk regions.”

The State Council added that it would also support state-owned companies in Guizhou to conduct strategic restructuring.

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Last year, Beijing stepped up its supervision of LGFVs as it was concerned that a local government debt crisis would hit the country’s state-dominated banking sector, which has the most exposure to off-balance borrowing.

Investors are concerned that Guizhou could default on its LGFVs bonds that are currently listed on stock exchanges, which may trigger panic selling in bonds sold by other provinces.

A default in 2020 by Yongcheng Coal & Electricity Holding Group, a mine operator owned by the Henan provincial government on a AAA rated 1 billion yuan commercial paper, rocked the capital markets.

The default also triggered panic selling of many other local government debt, reflecting weak confidence of investors in local government finances as well as their ability to repay the debt on their LGFVs.

In the end, it depends on how much investor confidence is restored

Ivan Chung

“I think that it is more likely that the message [from the State Council] is aimed at steadying the confidence in the public bond market so that the LGFVs in weaker provinces are able to raise funds. In the end, it depends on how much investor confidence is restored,” according to Ivan Chung, associate managing director at US rating agency Moody’s.

“What we saw last year was that investors would rather go for lower yielding bonds issued from LGFVs in smaller regions in economically more developed provinces than bonds issued by provincial level LGFVs in less developed regions.”

LGFVs mostly borrow money to fund infrastructure projects that do not immediately produce a return, and much of the debt, other than those listed on stock exchanges, is not publicly disclosed, leading to growing concerns of a so-called hidden debt.

The debts are also packaged into trust products, which are fixed income investments that offer regular interest payments, and are often sold to both institutional and individual investors in China.

Ultimately, the market may be more worried about Guizhou’s growth prospects, further shrinking financing channels and rising financing costs. This is not a long-term solution to alleviate debt pressure

Guangfa Securities

Guangfa Securities said on Thursday that Guizhou has seen its revenue decline since 2018 while facing increasing debt repayment pressures.

“Ultimately, the market may be more worried about Guizhou’s growth prospects, further shrinking financing channels and rising financing costs. This is not a long-term solution to alleviate debt pressure … a sustainable financing environment becomes even more important,” Guangfa Securities said.

They added that the State Council’s new debt limits may mean Guizhou will be able to refinance its debt with a new bond quota from the Ministry of Finance that could help it resolve its hidden debts.

Lu Ting, chief China economist at Nomura, estimated that total local government hidden debts, including loans and bonds, hit 45 trillion yuan (US$7.1 trillion) at the end of 2020, equivalent to 44 per cent of China’s gross domestic product (GDP).

This is more than four times the 9.6 trillion yuan at the end of 2010, which was around 23 per cent of GDP, according to Lu’s estimates.

Western China under ‘greatest’ debt repayment pressure amid default fears

But despite the growing debt pressure, the State Council said that Guizhou would continue to push for infrastructure spending in the coming years, including the development of a high-speed railway that links the capital city of Guiyang to Chongqing in Sichuan province.

Guizhou’s ability to control its debt has been called into question in the past after Dushan County embarked on a construction spree between 2016 and 2020, which included a number of white elephant projects.

This included a 99.9 metre (329 feet) high wooden building that it had hoped would earn recognition as a Guinness World Record.

The county government subsequently admitted “reckless” borrowing and vowed to make changes.

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