Local Government Financing Platforms Fade, Private Business Steps Up

CITIC Real Estate is working with the Shantou government in Guangdong province. The project is woth more than $8 billion and is expected to take 25 years to complete, covering an area 5 times the size of Macau.

The project shows the way forward for Chinese reforms as government exits the economy and replaces it with rule of low.

Here'a bit on the public-private partnership model that is being used by Shantou and CITIC:
China: The First Step in Fiscal Reform
The new rules will also reduce the investment role of local governments by dividing future projects into three categories. First, local government should no longer be involved in commercial projects (e.g. commercial real estate), and such existing projects should be sold to the market and the debt should be converted into corporate debt. Second, the cooperation between the government and social capital (via public-private partnership (PPP) or franchised operation) will be promoted to finance some public projects, in areas such as infrastructure, water supply, waste disposal, etc. Third, for those public projects that are difficult to attract the participation of social capital, local governments can finance them by issuing local government bonds. It is clearly stated that local governments are no longer allowed to raise debt via corporate or financing platform entities.

The future China will have a smaller, but stronger, more powerful government, along with a much larger and more efficient private economy.

Economic Observer: 政府融资平台消退 城市运营商民间扩招

Economic Observer newspaper reporter Wu Wei-ting with local financing platform boom faded, the developers involved in the city's comprehensive development is moving towards the institutionalization process.

The Economic Observer newspaper was informed by the local people's congresses country's first government-enterprise cooperation through integrated development project, already the curtain. Recently, CITIC Real Estate regard to the Economic Observer newspaper introduced its 50 billion new town development project in cooperation with the Government of Shantou Hou District, has completed the first block of referral.

According to official statements, CITIC Real Estate's urban operations, to become China's new urbanization PPP mode (cooperation between the Government and social capital) advocates. It signed a strategic cooperation agreement with the Government Hou District, Shantou City, three years ago, the development of Guangdong province's largest city regional integrated development projects.

October this year, the Ministry of Finance issued a document to guide local debt again disposal and to encourage PPP model for urban development. Lin Zhu, vice president of CITIC Real Estate, said: "Recently in 2023, the local government financing platform has been applied to the extreme leverage, but also hope and CITIC This includes financing capacity and influence of the central enterprises cooperation, which is done CITIC largest city carriers advantage. "

In the past, government and business cooperation, because the system is not clear, the head of government and lead to general government default, only a few have the resources of enterprises and local government financing platform to bear the immediate level of development. And in this new area of ​​development and testing Haojiang, changing government behavior and cooperation between government and enterprises have emerged.

Near Shantou city government sources said earnings risk-sharing mechanism of cooperation between government and enterprises, and to be protected only through "legislation" and other forms of social order to attract more private capital admission.

CITIC push to the NPC endorsement

In mid-September, CITIC Real Estate promote its first PPP model projects in Guangzhou, located in the coastal town Haojiang CITIC Shantou City. Site Shantou municipal government and a number of other leading brands developers were present.

CITIC coastal city for the launch of the South coast Area four high-quality land, the project company - CITIC coastal city Investment and Development Co., Ltd. (hereinafter referred to as "CITIC coastal city"), Lan Yu, deputy general manager, said, "block transfer timing can be adjusted according to the needs of developers, the selling price will be adjusted according to market conditions, to ensure that every developer has a reasonable profit margin involvement. "

The reason Recommend Lot "hero" is not the government but CITIC coastal city, because the Shantou municipal government authorized Haojiang, through an open tender to confirm CITIC Real Estate as the sole government party partners. Lan Yu in an interview with the Economic Observer newspaper interview reports, CITIC coastal city transferee level of development rights, plus part of the operating rights and investment rights, "Institute of the Ministry of Finance has confirmed that the project development model for a typical PPP model."

This is currently the largest city in Guangdong Province comprehensive project development operations, covering a total area of ​​168 square kilometers, enough to have five Macao size reached 92.8 kilometers of coastline, the total investment of over 50 billion yuan. The entire project scheduled for completion in 25 years to develop, Shantou Area south coast for the first phase of the boot area, the building of the headquarters-type RBD group (leisure and business district).

May 2013, the Metro company approved Hou District, Shantou City Administration for Industry and registered officially established with a registered capital of five hundred million yuan, "mainly engaged in land development, urban and rural infrastructure and supporting project development and construction, real estate development, real investment. "

CITIC coastal city business scope involved the construction of infrastructure facilities, including a key project - Josue cross-harbor tunnel project, and the total length of 6.8 kilometers, the total investment is expected to reach 50 billion yuan, the construction period of about five to six years. There are historical and cultural Chaozhou Expo Center and other cultural projects.

These are investment and profitability of the enterprise put to the test.

Bamboo forest on the Economic Observer newspaper said: "CITIC urban operations is to enhance the level of development as the foundation, which has a development characterized CITIC and local governments to enhance the overall functionality of a shared city after the land and resources to enhance the value premium results.."

"This consolidated results is a common mechanism for the formation of CITIC with local government through legal mechanisms convention: Share of land, property, assets and enhance the value of other franchises after, are included in it than just buying land Gailou sale of flats in the way. "said bamboo forest.

Bamboo forest called "legal mechanisms" that both government and enterprises on how to profit from the land in return program has been reviewed and approved by the local people's congresses.

Lan Yu said the company's most worried about is the policy risks and government risk. "State of the PPP mode and do not have the law, this is the policy risk. The breach of contract because of the change of government and other causes, the risk belongs to the government."

Its introduction, the two sides entered into very detailed terms of cooperation, business and government have both rights and obligations prescribed, before the contract have been strictly economic calculation. "Through legal means, increasing the cost of both breach of contract." Lan Yu said.

After the failure of the traditional means of financing

Domestic land prices soared in recent years, real estate developers to continue to achieve scale and efficiency, a direct participation in local development impulses more strongly.

Brand Head of a central rate it clear that the group spent a lot of effort and time, research summarized a set of new town development business model, I hope the local government with its headquarters outside the city, but also to "give a piece of land big enough" to Copy the above model. Some powerful private enterprises are also in frequent contact with the local government, hopes to develop New Town.

The company's "endowments" different, patterns are also different. For reference model has China happy mode, Wanda mode, safe mode, OCT mode. However, from the government's perspective, the key is whether steadily to complete the development and construction work.

. "Industry Import of course, is one of the goals, but the most important thing is to invest in" the aforementioned persons close to the government said: "The company can not melt the money to complete the entire project development and construction, is critical."

The parties, local governments choose which companies to cooperate, in fact, countries in the guide, "The state is very strict control of local government debt, local governments can now set up a company, soil storage center also needs according to their ability to finance. In other words, the traditional has been ineffective means of financing local government to find partners criteria will therefore change. "

And Haojiang government "most valued resources CITIC Real Estate. Metro development process requires a lot of capital investment, CITIC Group has the financial background, strong financing capability." The source said.

Recently, the media revealed that the Ministry of Finance "clean up local government debt stock disposal measures" being consulted. This is the implementation of the October 2 release of "State Council on strengthening local government debt management advice" supporting documents. Both documents clearly how to dispose of the stock of debt and how future incremental financing, accustomed to borrowing way for the development of infrastructure in terms of local government would be "depth charges."

Among them, for increment financing, debt financing documentation requirements can only be borrowed by the provincial local government under the quota management and does not encourage the formation of government debt financing through the PPP mode. Over the years, as the main channel for local government debt financing of government financing platform, will be closed, merged, transformation.

"Means the local government to defuse financial risks has changed, no longer to be completed by way of borrowing from infrastructure development .PPP mode among a share to the enterprise, but also become a means of financing the government." Lan Yu said.

However, it is necessary to import industry, urban infrastructure construction and operation, business services development, housing and other tasks all by independent market players to wield the sword, behavior of the government in other areas also need to change. In particular, there is no stable returns expected for some industries and projects, how to create the conditions to attract private capital through institutional reforms and services, as the government must think about.

Government sources close to the above description, made a lot of breakthroughs in cooperation with CITIC, within the legal framework of bold exploration, "in line with the general direction of the state administrative system reform." The end result is a position of absolute dominance in the coastal CITIC Metro project, "The government only fulfill right of approval, the project is responsible for the operational management of CITIC."

Of course, this project also occupy a certain "place", the seat of Shantou, Macau and Guangdong Foshan Shunde district has only two power-level city, there are many inherent advantages.

The source also revealed: "Merchants are generally government action, but on this project, part of the investment powers of the government to transfer to the enterprise," the government will go to constraints on business investment in the future according to Area planning, industrial structure and other factors and regulatory, but need to gradually do it.

"Only the central enterprises"?

CITIC Real Estate and cooperation intention Haojiang government spent more than a year before they talk down. Specific cooperation agreements, and spent the same length of time, the result is "to talk about a very large system of cooperation."

The aforementioned sources close to the government, when the government chooses coastal city partner intention is very clear. "Central enterprises Cooperation with central enterprises, local governments mainstream choice." The source said.

Lin Zhu said: "As we all know, CITIC Group has licenses to operate full advantage of the financial sector, with the real estate industry needs banking, insurance, trusts, funds, securities and other industries, which formed a huge urban operations support."

A central rate of insider said: "The government increasingly strict requirements before land value through profit enterprise, it must take a lot of infrastructure, such financial pressure is not an ordinary business can afford."

Bamboo forest view, CITIC in terms of industrial import also advantage. He said: "In the non-financial sector, architectural design, construction, environmental protection and energy conservation, and technology research and development and other areas within the CITIC Group has a lot of business resources; import other industries through integration of resources, and to cooperate fully and local governments, thereby participating countries The new town construction. In addition, CITIC Group also has a number of industrial advantages, including engineering and manufacturing, equipment manufacturing, steel chemical and automotive industry advantage. "

"This project can only be borne by the central level, the local state-owned enterprises are difficult to replicate in different places. Some strength particularly strong private enterprises also have the opportunity, but the way of doing things need to run with the government." The source continued.

The proximity government source said: "The government is the need to implement policies, which is the central level, consistent scale state-owned enterprises and local governments, in unison, but the general private companies may be difficult to understand some of the practices of government." Its example, government projects require bidding , procurement, private enterprises may be accustomed to these steps.

"'No legal prohibition to as' say is private, not government and state-owned enterprises. Government is not required by law to do, and could not do it." The source said.

However, a nationwide private insiders are not recognized. The company is studying the learning PPP model is the most sophisticated domestic Chinese Happiness Foundation, and on a small scale pilot in cooperation with the government.

"The future is the capital of the powerful of the world, which I agree with, but not necessarily only by the central enterprises to participate in State intends to encourage private capital, inevitably there will be more to eliminate barriers to entry of private enterprises supporting policies." The person said "We have to do now is to study their own model."

Known as China's largest integrated private enterprise class Fosun also found the opportunity to participate in PPP mode urbanization construction. Liang Xinjun, Vice Chairman and CEO of Fosun Group, Fosun Group launched the essence of urban hive products, summed up as "to produce and promote the city, the city produced fusion."

Honeycomb city needed funds, the first provided by the group, followed by real estate funds may be issued or project funds, and finally you can also dock or in cooperation with other agencies and domestic and foreign venture capital. Liang Xinjun said: "pluralistic participation, which can be called public-private partnerships."

Some analysts believe that, PPP model can not only reduce the government debt burden will also be Forced transformation of government functions, thus reducing the specific aspects of the intervention, the more engaged in the planning, is the question of the meaning and regulatory strategy. PPP model is not only the meaning of "benefit sharing", and "risk-sharing" connotation, like CITIC and Hou future government to seek the same legal protection practices of bilateral cooperation will be more and more.

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