Debts of 2 trillion yuan and rising

PUBLISHED : Tuesday, 08 November, 2011, 12:00am
UPDATED : Tuesday, 08 November, 2011, 12:00am

In a sign that the troubled Ministry of Railways is scaling back its rail-building projects, it is denying earlier media reports that it is seeking 800 billion yuan (HK$978.8 billion) of funding.

Instead, because of the difficulty in obtaining bank loans, the cash-strapped ministry is expected to issue 240 billion yuan of bonds this year, nearly reaching its legal bond limit.

Recent mainland media reports claimed the debt-ridden ministry was seeking 800 billion yuan of financing from Beijing to ensure the continuation of rail construction projects. The new funds were to consist of 400 billion yuan of financial support from the Ministry of Finance and 400 billion of bonds to be issued.

Xinhua reported yesterday that it received confirmation from the ministry that the rumoured 800 billion yuan figure was false. However, Xinhua reaffirmed earlier reports that the ministry would soon receive 200 billion yuan of funding.

The ministry also planned to issue 240 billion yuan of bonds this year, 37 per cent more than last year, and more than double that in 2008, said James Chung, an analyst with MasterLink Securities.

The ministry's planned 240 billion yuan bond issue this year was near its legally permitted limit of 30 per cent of its net asset value, said Chung.

If the ministry wanted to issue more bonds beyond that limit, it would need special permission from Beijing. 'Initially, the ministry took out a lot of bank loans,' he said. 'Later, the ministry couldn't get loans, so it had to issue a lot of bonds.'

The ministry's 200 billion yuan of financing with Beijing's help would restrict the amount of rail projects it could undertake, Chung said. That was because much of the 200 billion yuan would be in loans, which would add to the interest payments of the heavily indebted ministry.

As such, Chung expected the mainland's actual railways expenditure would fall short of the ministry's targets for the next few years.

In the first half of this year, the ministry's debt stood at 2.1 trillion yuan, according to the prospectus of its third long-term rail construction bond issue.

For this bond issue, the ministry plans to issue 15 billion yuan of seven-year bonds plus 15 billion yuan of 20-year bonds, at interest rates close to the one-year Shanghai interbank offered rate. Yesterday, the one-year rate was 5.26 per cent.

An interest rate of about 5 per cent for long-term rail construction bonds is high, compared with 2 per cent in previous years, says an equity analyst who declined to be named.

For the 12th five-year plan to 2015, former railways minister Liu Zhijun previously envisaged a fixed asset investment of 3.5 trillion yuan. But that was scaled down to 2.8 trillion yuan after he was sacked and arrested for suspected corruption in February, according to a Citigroup report.

Citigroup has further reduced its estimate for the mainland's railway fixed asset investment to 2 trillion yuan, from 2.8 trillion yuan for this period.

The temporary suspension of new rail projects by the State Council in August in the wake of July's high-speed train accident was 'the biggest reason why the target of 2.8 trillion yuan of railway fixed asset investment can't be reached', Chung said.

800b yuan

The average amount, in yuan, the railways ministry needs a year over the next five years, says a Chinese expert