December 21, 2013 7:00 am JST

Chinese local government debt hits new high

NORIYUKI DOI, Nikkei staff writer

An investment firm owned by Nanjing is spearheading a large housing project on the outskirts of the city.

SHANGHAI -- Local governments in China have taken on more new debt in 2013 than ever before as they use shadowy bonds to splurge on infrastructure projects, stoking concerns over potential risks to the nation's financial stability.

     Local governments are generally not allowed to issue bonds. But they sidestep the ban by having affiliated investment firms do so and invest in infrastructure projects.

     As of Friday, the value of bonds issued by these financial vehicles in 2013, together with commercial paper, had reached a new high of 967.9 billion yuan ($159 billion), corresponding to just over 20% of the corporate bond market. The previous 950 billion yuan record was marked last year.

     To curtail local governments' excessive investment, Beijing has directed banks not to lend more to the investment firms, but to only limited effect. The firms have opted to issue high-interest bonds instead and continue pouring money into real estate and other investment.

     Take a project, slated for completion next year, to build 30 high-rise apartment buildings on the outskirts of Nanjing. An investment firm wholly owned by the city oversees the 6.2 billion yuan endeavor and raised 600 million yuan through its late-November issuance of bonds with an annual interest rate of 6.57%.

     Despite their fragile financial standings, many financing vehicles can afford to issue bonds simply because many in the market believe that they have the backing of local governments, which in reality are prohibited by Beijing from extending official guarantees. 

     "In the event of a crisis (at such firms), the local government would probably come to the rescue," an official at a bond investment fund in Shanghai says.

     An investment firm that continues to bleed red ink has succeeded in issuing 1 billion yuan in bonds by obtaining a high credit rating stemming from the presumed strong support of the local government.

     The combined debt book of these investment companies amounts to 37% of China's gross domestic product at 19 trillion yuan, Nomura International estimates. The National Audit Office in August launched a comprehensive survey of public debt, including that shouldered by the investment firms, but has yet to announce the results.

 

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