Tip of Iceberg Hit: Chinese City Overdue on Illegally Raised Shantytown Renovation Shadow Loans

JRJ: 又一个城投违约了--地方债务危机下的缩影

Recently, the special subsidiary of the China Post Fund initiated the establishment of a special subsidiary of the first-class light management, "First-class light control, Southeastern Kaihuang Asset Special Asset Management Plan No. 1" was overdue, and the financing party was Guizhou Qiandongnan City Investment Corporation.

　　According to the public information, the product was issued to the borrower, Southeastern Kaihong Assets Operation Co., Ltd. (hereinafter referred to as Kaihong Assets) through the Kaili Yingbin Branch of Guizhou Bank, and finally used for the transformation of the shantytowns by a subsidiary of the Qiandongnan Government (autonomous prefecture in Guizhou).

Recently, the city's repayments have been frequently overdue. Last month, the Federal Reserve Securities-Jiangsu Securities-Jiangrong No. 1 Collective Asset Management Plan was overdue. The main body of the plan financing is Inner Mongolia One City Investment Company - Inner Mongolia Kerqin City Construction Investment Group Co., Ltd.

Maybe this is why CDB too over funding of shantytown renovations from local branches?

In fact, this is just the tip of the iceberg of local invisible debt. In the past, some local governments used the PPP and government purchase of services to illegally raise money. Of course, including the above-mentioned concerns, the shed reform loans have brought hidden troubles to local hidden debts.

The monetization of sheds has increased the hidden debt risk of local governments to a certain extent. Only by returning to the nature of "shed reform", the local government debt in the shed reform will gradually become "visible", and the government leverage ratio (i.e. government debt/GDP) will be closer to the true level.

Another arrow pierces the heart of the "but China's government debt-to-GDP ratio is low" argument.

However, while solving the problem, you can't be too hasty, otherwise there will be systemic financial risks.

　　Today, the Ministry of Housing and Urban-Rural Development stated that it will promote the monetization of sheds in accordance with local conditions and do not make a one-size-fits-all approach.

　　The Ministry of Housing and Urban-Rural Development said that in places where commodity housing stocks are insufficient and housing prices are under increasing pressure, the shed-reform resettlement policies should be adjusted in a targeted manner, and more ways of newly-built shed-renovation houses should be adopted; where commodity housing stocks are large, Continue to promote the monetary resettlement of the shed.

How much debt are Chinese local governments hiding off balance sheet?

Huge implicit debt

　　Up to now, the national local government debt balance has reached 16.2 trillion yuan. From the perspective of statutory limits, the risk of government explicit debt is not high, but if implicit debt is considered, the local debt is very large.

In April this year, the Auditing Department’s “Tracking Results of the Implementation of Major National Policy Measures in the Fourth Quarter of 2017” showed that six cities and counties in five provinces issued a letter of commitment, financing lease, and signed an engineering government purchase service agreement. In other ways, the debts were disguised and the government’s implicit debt was 15.422 billion yuan.

　　Part of the disguised debt here is the local financing platform, including the city investment company to endorse the government credit endorsement. Since its inception, City Investment Corporation has not been a fully market-oriented company, and it has inextricably linked with local governments.

However, under the regulatory crackdown, financing is tight, from the perspective of the policies introduced, local governments will no longer endorse such platforms, breaking the redemption (defaults), and the harm caused by these invisible government debts will also emerge.

Referencing this table:

Jiangsu, which has the highest government debt, is followed by Shandong, followed by Zhejiang, Guangdong, and Guizhou. However, considering local GDP and fiscal capacity, according to Tianfeng Securities, the debt ratio (the proportion of government debt to GDP) is 52% in Guizhou, and Qinghai, Yunnan, Inner Mongolia and Liaoning are higher than 30%. In terms of the ratio of government debt balance to comprehensive financial resources, Guizhou has the highest rate of 86.6%, followed by Yunnan Province with 85.2%, and Liaoning, Shanxi, and Inner Mongolia with more than 70%.

　　But in reality, this is only a visible debt, we must also consider a hidden debt.

Guizhou moved up from 31st out of 31 provinces in 2014 GDP per capita, to 29th in 2017.

Up to now, the government's explicit debt scale reached 29.95 trillion, of which the central debt was 13.77 trillion, the local debt was 16.18 trillion, and the total debt accounted for 36.2% of the national GDP. From the perspective of statutory limits, the risk of government explicit debt is not high, but if implicit debt is taken into account, the scale of local debt is very large.

Growth of local government debt in the past 10 years.

Since the real debt data is in the hands of local governments, it is not disclosed. At present, there is a lack of complete, accurate and persuasive statistics on the scale of local debts. However, the scale of local debt has become a consensus. Some scholars estimate that the size of implicit debt of local governments is about 2-3 times that of explicit debt.

Or 100 percent of local GDP. And if you add up all the local GDPs together, it is 100 percent of national GDP.

"Finance" (blog, Weibo) recently said that the relevant departments of the central government are studying and formulating documents to prevent and control local government debt risks, including the identification, mapping and resolution of implicit debts. In the next step, the relevant central ministries and commissions are expected to introduce unified standards and standards for the implicit debt of local governments, and will also launch a series of symptomatic drugs to resolve the hidden debts of local governments, so as to avoid the risk of debt out of control.

　　As localities begin to map out hidden debts, more and more hidden debts will become explicit.

The estimates of 3 times GDP comports with the number mentioned in a piece earlier this week, History Repeats: Chinese City Tells Banks to Lend To City LGFV or Else. The amount of debt in local government funding vehicles could be 60 percent of GDP or 3 times official local government debt. However, if the Qiandongnan government illegally raised funds, that estimate might be a conservative one.