How to Shore Up Local Financing Platforms

A Wuhu Construction Investment Co. bond tender July 22 was the third for a local government financing platform in less than 10 days, triggering speculation that the central government had backed off from tightening platform credit rules.

But in fact, a senior analyst at a rating company said, Wuhu and the other project sponsors had gotten green lights for their tenders shortly before the State Council's June 10 clampdown on borrowing and investment vehicles.

The order silenced urban investment bond activity for a full month. And despite the recent flurry in July, local financial platforms across the country have continued to show no signs of a true revival.

Moreover, said the rating agency analyst, who evaluates local platforms, none of the latest projects were tied to pledges from accounts receivable sources, which were often used to pay bond investors in the past.

Bonds issued by Shangrao Urban Construction and Development Investment Co. on July 15 were backed by government land-use rights, while the Maanshan City Construction Investment Co. tender July 20 included a third-party guarantee that was not a financing platform but, rather, local steelmaker Masteel.

Xu Lin, director of fiscal and financial affairs at the National Development and Reform Commission (NDRC), told Caixin that platforms with recent bond offerings had standardized projects according to the State Council's order. The move was designed to prevent hidden government guarantees, such as accounts receivable financing, "mainly for the purpose of preventing formation of a direct relationship between an enterprise and the government," Xu said.

Maanshan signed a build-transfer cooperation agreement with the Maanshan city finance bureau, through which the construction company would build on behalf of the local government, which would ultimately repurchase the project. But the paperwork did not include an accounts receivable pledge.

Zhou Yuanfan, a director at Pengyuan Credit Rating Co. Ltd., said under current rules build-transfer agreements can provide revenues for financing platforms but cannot be used to increase credit. For that reason, previously completed bond applications from many platforms are now being adjusted.

Only a handful of the more than 8,000 financing platforms nationwide are qualified to raise funds through corporate bond offerings. Banks were the most widely used credit source for platforms during their explosive borrowing growth period in 2009, before the State Council clampdown.

Now, banks are more cautious about lending to financing platforms. The head of the loan management department at a state-owned bank told Caixin "lending will definitely not be like it has been."

Loans generally will only be extended to projects already under way, and repayment guarantees are mandatory through more reliable schemes such as expressway tolls.

Clean-Up Strategy

Local governments and banks are also eyeing possible ways to clean up existing loan books at financing platforms.

Naturally, banks don't want to be stuck with unpaid loans. Thus, according to a loan management chief at a state-owned bank, banks are "unlikely to significantly ease the extension of loans to financing platforms over the next few months."

He said the latest State Council document made no explicit statements about repayment sources for loans that financed ongoing public works projects that have yet to or may never generate revenues. So some fear local governments might seek debt relief by merging investment platforms.

The next few months could determine the course for local governments and lender risk, the loan department chief said. "The end of the year will be a critical time," he said.   

A Shanxi Province finance official told Caixin his department is now formulating a related provincial scheme that should be announced before September. "Investment growth in the second half of this year will surely be affected," he added.
   
Nationwide, government-led infrastructure investment in the first half 2010 slowed, pacing moderating investment growth overall. Investment in infrastructure in June grew 14.9 percent from a year earlier. Growth in June 2009 had been 30 percent year-on-year.

Yet central government investing has picked up. On July 5, NDRC announced 23 new project starts for the 2010 Great Western China Development program with a total investment of 682 billion yuan.

Niu Li, macroeconomic department director for the economic forecasting division of the State Information Center, told Caixin most of these development projects had been planned earlier but implementation was slowed earlier this year due to concerns of economic overheating.

Now that nationwide economic growth is expected to decelerate in the second half, these projects may accelerate.

The Ministry of Finance said at a conference in early July government spending must accelerate in the third quarter, and that governments should strive for significantly higher spending through November compared to the same period last year.

To that end, central government projects have received matching financial support from local governments that issued bonds in recent weeks through a finance ministry program. Between June 18 and July 16, for example, the ministry offered three tranches of local bonds worth a total 67 billion yuan.

An official at the ministry's economic development agency said investment progress has accelerated, and any clean-up of local financing platforms would not affect projects included in the central government's 4 trillion yuan economic stimulus program, launched in 2009 in response to the global financial crisis.

Local government matching funds are guaranteed, the ministry official said. "Resolving funding issues on a wholesale basis is a cinch" through measures such as local debt offerings, he said.

The national treasury's deposits for all governments in China topped 3.03 trillion yuan at the end of May, according to the People's Bank of China, with the central government likely controlling the bulk. But urban government fixed asset investment totaled 9.8 trillion yuan in first half, and the proportion going toward central government projects slipped to 7.6 percent.

A large volume of new local projects will likely be needed if goals for accelerated government investing are to be reached in coming months. And local projects usually rely on local financing platforms.

1 yuan = 14 U.S. cents