Inland govts' debt 'more risky'

Officials consider a range of strategies to overcome fiscal problems

The risk associated with the debt of some inland local governments is significantly higher than for their coastal counterparts, the chairman of Beijing-based Dagong Global Credit Rating Co Ltd said on March 25.

"With a much smaller fiscal revenue base, the risks of some inland local governments' debts are significantly higher than for coastal provinces," Dagong Chairman Guan Jianzhong said.

Dagong is a major domestic ratings firm that has provided credit ratings to many of China's local government financial vehicles.

Although Chinese officials have often said that the overall risk associated with the nation's local government debt is "controllable", audit results point to major risks in some specific areas.

A survey conducted by the National Audit Office found that, as of June 30, 2013, local government debt and contingent liabilities had surged to about 17.89 trillion yuan ($2.9 trillion), a 67 percent rise from the previous estimate of 10.7 trillion yuan at the end of 2010.

At the end of January, provincial-level governments across the country released independent audit results, which offered a clue to how government debts are distributed geographically.

An analysis of these reports indicates stark divergences among these governments. Comparing total debt to comprehensive fiscal revenue, Beijing topped the list at 99.86 percent.

Next came three provincial-level governments in the southwest -Chongqing, Guizhou and Yunnan - all with ratios in excess of 80 percent.

Coastal provinces, such as Jiangsu and Guangdong, had the most debt in absolute terms, but their debt-revenue ratios were moderate. For example, Jiangsu province owed 1.48 trillion yuan - the most of any provincial-level government - but that only accounted for 60.34 percent of its fiscal revenue.

"From a ratings perspective, we can say debt in Chongqing and Guizhou is more risky than in Guangdong and Jiangsu. But we cannot predict whether they will default or not," Guan said.

Local governments can repay debt using many strategies beyond drawing on fiscal revenue, he noted.

A primary option is to roll over debt. Many local governments are already doing that, either by taking out new loans or asking banks to extend the repayment period of maturing debt.

Another strategy, said Guan, is allowing local governments to issue bonds directly. They can then replace the old debt, usually with a short maturity and a high interest rate, with bonds, usually with a longer maturity and a lower rate.

The central government has already signaled its willingness to give local governments some autonomy to issue municipal bonds. Finance Minister Lou Jiwei told a forum over the weekend that the government is considering the possibility.

"It's not fair if projects that will benefit future generations are funded only through the tax payments of the current generation. So it's OK to issue some bonds, but under strict conditions," Lou said.

Analysts say this would be an important shift, because municipal bonds, which usually have long maturities and low rates, match the financial profiles of projects that local governments borrow to pay for.

"A majority of local government debt has been invested in infrastructure projects. The nature of these projects means their short-term cash flow is often insufficient to cover debt payments," says Song Li, a researcher with a think tank under the National Development and Reform Commission.

"However, barred from issuing bonds, local governments have taken to raising short-term debt for long-term purposes. The real problem for China's local governments is maturity mismatch. Municipal bonds can address the problem," Song says.

Guan agreed, saying: "If inland regions can issue a 30-year municipal bond, you really can't say that they won't be able to repay it within 30 years."

But Guan also warned that compared with coastal provinces, inland provinces have pronounced "transparency" and "management" issues.

With a weaker governance capacity, it's uncertain they can use debt efficiently, he says.

"A key question is whether they can use that money to invest in pro-jects that really foster wealth creation.

"If they can enhance their repayment capacity, it should be no pro-blem. Otherwise, it is risky," Guan said.

zhengyangpeng@chinadaily.com.cn

(China Daily Africa Weekly 03/28/2014 page21)