Ratings agency pans infrastructure scheme

PUBLISHED : Monday, 21 May, 2012, 12:00am
UPDATED : Monday, 21 May, 2012, 12:00am

A mainland credit rating agency has warned that plans by the government of Jiangsu province to spend heavily on infrastructure to stimulate the economy are 'premature'.

'At this stage, the Jiangsu government is undertaking large investments in highways to stimulate the economy, which is creating a situation of premature investment,' said the agency, China Chengxin International Credit Rating, in which US ratings agency Moody's has a 49 per cent stake.

Jiangsu's state-owned infrastructure company Jiangsu Communications Holding said in a bond prospectus that it planned to invest 118 billion yuan (HK$145 billion) in the eastern province over the period 2011 to 2015, including 81 billion yuan on expressways, 16 billion yuan on rail networks, and 7 billion yuan in real estate.

Jiangsu Communications plans to issue 2 billion yuan worth of one-year bonds on Wednesday, of which 1.9 billion will be used to repay outstanding loans of the heavily-indebted company.

Jiangsu had 4,059 kilometres of expressways at the end of 2010, making it the province with the highest expressway density in China, said the bond prospectus.

'In the next three years, Jiangsu will maintain an annual investment of more than 10 billion yuan on expressways. As the main investor in Jiangsu's expressways, the company will make large investments in the expressways.'

In the 12th Five Year Plan period from 2011 to 2015, Jiangsu was expected to build 1,200 kilometres of expressways, Cheng Xin said. The province also planned to increase its rail network by between 2,150 kilometres and 3,800 kilometres by 2020, Cheng Xin added.

'Such huge capital expenditure will increase the company's funding pressure. Returns on the company's newly-built roads risk declining,' the ratings agency warned.

Mainland banks are providing de facto guarantees for bonds issued by local government-financing platforms, a practice that has raised concerns over the risk that local government debt could pose to the nation's banking system.

In an interview with mainland online media last week, Finance Ministry official Li Cheng said local government debt was manageable and had been effectively contained. This year, 250 billion yuan in local government bonds will be issued, 50 billion yuan more than last year, Li forecast.

Jiangsu Communications said it was able to repay its debts in the next few years. The company projects its revenue will rise from 42.77 billion yuan this year to 59.55 billion yuan in 2014, while net profit will increase from 7.19 billion yuan this year to 10.76 billion yuan in 2014. It says repayment of principal plus interest on its debt from 2012 to 2014 will total 122.6 billion yuan, and adds that cash flow will be more than sufficient to cover this.