Home
News
In Focus
Business
Metro
Nation
World
Sports
Feature
Opinion
View more »Opinion Columns
Wan LixinOpinion deputy editor of Shanghai Daily
Forum emphasizes BRI cooperation between China and Arab countries
Rights to lower sleeper berths should be softened by empathy for fellow passengers
Sunday
- Subscribe
Home » Opinion » Foreign Views
Huge risky borrowing hangs by a thread
By Sean Maguire |
June 29, 2010, Tuesday
|
Print Edition
Print Edition
CONCERN is mounting within regulatory authorities about the scale of debt carried by local government-backed investment vehicles, debt which has the potential to destabilize public finance in China.
Local governments are effectively prohibited from borrowing directly or raising taxes, but they are able to circumvent these restrictions by setting up special purpose vehicles to borrow cash to fund infrastructure and development projects, the most common example being the urban development investment vehicle (UDIV).
The authorities have long turned a blind eye to this practice, but with rapid escalation of the debt carried by the UDIVs, fueled by last year's banking lending bonanza, eyebrows are being raised and pulses are quickening in Beijing.
These quasi-independent investment vehicles typically seek loans backed by assets - usually land - or on the basis of implicit assurances from local officials that the central government will bail them out if things get tricky. And tricky they could get, particularly if the fizz goes out of China's property market.
Uncertainty remains as to the extent of the debt carried by UDIVs, with figures ranging between 5.6 trillion yuan (US$824.1 billion) and 9 trillion yuan being suggested.
The problem is that no one knows for sure the depth of this particular financial black hole. Economists at Citigroup suggest that UDIVs will be exposed to the tune of 12 trillion yuan by late 2011 and should the property bubble burst, banks would be left with a hefty weight of non-performing loans.
As things currently stand, local government debts are around 20 percent of total outstanding bank loans and if these were to turn sour the banks would be left with a non-performing ratio of around 4.4 percent.
There are a couple of problems looming on the horizon.
Much of the borrowed cash has been funneled into large-scale infrastructure projects and while these investments are generally smiled upon by Beijing, the mood is likely to alter if the projects in question fail to generate enough growth and revenues to cover operating costs and repay loans.
Historically, such projects have managed to stay out of trouble by stimulating the local economy and servicing loans on the basis of higher future tax and transaction revenues.
The main worry is that many of the recent infrastructure projects may not have the revenue generating power of earlier bridge, road and port building schemes as greater emphasis has been placed on eco- and social utility based projects.
On top of this, Beijing is in the throes of a determined campaign to rein-in home prices, which has had the effect of sending sales tumbling, prices heading south and local governments' land sales revenues following suit, thus impacting on their ability to service the debts incurred by their 5,000 or so affiliated UDIVs. Not good, but that doesn't mean that it will all end in tears.
As always in the Chinese economy, there is sufficient flexibility within the system to iron out any niggling anxieties.
It is likely that Beijing will call for a reining-in of investment in energy-intensive, high-polluting projects and moves are already underway to impose stricter fiscal discipline and regulatory oversight on the behavior of UDIVs and perhaps even put a cap on their number.
That having been said, one can always get out of trouble by paying up.
It's not yet certain whether the buck would stop with state-owned banks or with the central government, but with Chinese economic growth still robust and money aplenty in the coffers, it is safe to assume that Beijing will allow local governments to default on loans taken out for infrastructure projects deemed to be in the national interest, should the need arise.
(The author is a lawyer at AllBright Law Offices in Shanghai. The views expressed are his own. Shanghai Daily condensed his article).
Local governments are effectively prohibited from borrowing directly or raising taxes, but they are able to circumvent these restrictions by setting up special purpose vehicles to borrow cash to fund infrastructure and development projects, the most common example being the urban development investment vehicle (UDIV).
The authorities have long turned a blind eye to this practice, but with rapid escalation of the debt carried by the UDIVs, fueled by last year's banking lending bonanza, eyebrows are being raised and pulses are quickening in Beijing.
These quasi-independent investment vehicles typically seek loans backed by assets - usually land - or on the basis of implicit assurances from local officials that the central government will bail them out if things get tricky. And tricky they could get, particularly if the fizz goes out of China's property market.
Uncertainty remains as to the extent of the debt carried by UDIVs, with figures ranging between 5.6 trillion yuan (US$824.1 billion) and 9 trillion yuan being suggested.
The problem is that no one knows for sure the depth of this particular financial black hole. Economists at Citigroup suggest that UDIVs will be exposed to the tune of 12 trillion yuan by late 2011 and should the property bubble burst, banks would be left with a hefty weight of non-performing loans.
As things currently stand, local government debts are around 20 percent of total outstanding bank loans and if these were to turn sour the banks would be left with a non-performing ratio of around 4.4 percent.
There are a couple of problems looming on the horizon.
Much of the borrowed cash has been funneled into large-scale infrastructure projects and while these investments are generally smiled upon by Beijing, the mood is likely to alter if the projects in question fail to generate enough growth and revenues to cover operating costs and repay loans.
Historically, such projects have managed to stay out of trouble by stimulating the local economy and servicing loans on the basis of higher future tax and transaction revenues.
The main worry is that many of the recent infrastructure projects may not have the revenue generating power of earlier bridge, road and port building schemes as greater emphasis has been placed on eco- and social utility based projects.
On top of this, Beijing is in the throes of a determined campaign to rein-in home prices, which has had the effect of sending sales tumbling, prices heading south and local governments' land sales revenues following suit, thus impacting on their ability to service the debts incurred by their 5,000 or so affiliated UDIVs. Not good, but that doesn't mean that it will all end in tears.
As always in the Chinese economy, there is sufficient flexibility within the system to iron out any niggling anxieties.
It is likely that Beijing will call for a reining-in of investment in energy-intensive, high-polluting projects and moves are already underway to impose stricter fiscal discipline and regulatory oversight on the behavior of UDIVs and perhaps even put a cap on their number.
That having been said, one can always get out of trouble by paying up.
It's not yet certain whether the buck would stop with state-owned banks or with the central government, but with Chinese economic growth still robust and money aplenty in the coffers, it is safe to assume that Beijing will allow local governments to default on loans taken out for infrastructure projects deemed to be in the national interest, should the need arise.
(The author is a lawyer at AllBright Law Offices in Shanghai. The views expressed are his own. Shanghai Daily condensed his article).
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
