Cash-starved China investment vehicles get fresh channels of funding
Accelerated bond sales and fast-growing trust products on the mainland have opened extra channels for cash-squeezed local investment vehicles to finance trillions of yuan in new road, rail, and highway projects, signalling a likely economic rebound later this year.
The growing credit supply, though still fairly insignificant, has in part offset local governments' weaker fiscal strength and sliding land sales after six consecutive quarters of slowing economic growth. It has also eased funding bottlenecks for the country's 6,000-plus local investment vehicles tightened by the regulator's lending curbs.
Since early this year, the National Development and Reform Commission (NDRC), the nation's top economic planning agency, has approved a trillion yuan in new projects, including some long-delayed steel mills.
A series of ambitious plans has been announced by municipal and provincial governments this year. Changsha, the capital of Hunan province, said it would recommend 195 projects to investors in a bid to attract total investment of 829.2 billion yuan (HK$1 trillion). Meanwhile, Guizhou, in the southwest, unveiled a 3 trillion yuan package focusing on eco-tourism infrastructure. Sichuan announced a 3.67 trillion yuan investment plan for this year and the next.
The plans have spurred a boom in trust products to fund the spending. The China Trustee Association said about 1.19 trillion yuan, or 22.6 per cent, of the total 5.3 trillion yuan trust funds, were invested in basic industries at the end of the second quarter.
On the interbank market, more than 400 local investment vehicles sold a total of 227.8 billion yuan worth of bonds in the first eight months, more than double the 107.4 billion yuan sold in the same period last year, China Credit Rating data showed. The eight-month total was also more than the 158.7 billion yuan in bonds issued by such companies for all of last year.
Local government investment in infrastructure has accelerated since the second quarter as funding conditions improved thanks to an accommodative monetary policy and rising corporate debt issuance, China International Capital Corp. (CICC) economists said after a field trip to cities in Hubei and Hunan last month.
"The marked rise in trust assets showed that the size of banks' financing for local investment companies isn't as small as it looks. They have only changed their ways of support," said Liu Yuhui, director of a financial research office at the Chinese Academy of Social Sciences.
A National Audit Office report revealed in June last year that local authorities accumulated 10.7 trillion yuan worth of debt at the end of 2010, with almost half borrowed through more than 6,000 investment vehicles. The repayment of the bulk of such loans relies heavily on local governments' land sales while some loans used illegal collateral.
The report fuelled concern that many of the loans could sour, prompting regulators to strengthen control on banks' lending. Banks are allowed to roll over some old debt and continue to lend to certain continuing projects that have sound repayment guarantees, though the pace of lending growth has slowed from the peak periods.
Banks, however, continue to be lured by good returns in some infrastructure projects, and believe the investments have implicit local government support. They are choosing to package loans through trust products to sidestep regulatory scrutiny of their balance sheets. The bank-trust co-operation had been earlier banned by banking regulators owing to difficulty of supervision but is now tacitly permitted.
Liu said the increasing credit supply might help stabilise investment growth, which slowed to 20.2 per cent in the first eight months from 25.2 per cent in the same period last year.
Some economists expect growth in gross domestic product will improve soon from the second quarter's 7.6 per cent gain, the slowest in three years.
Daiwa Capital Markets forecast GDP growth to rebound to 8.5 per cent in the fourth quarter, while Nomura predicted stronger year-on-year growth of 8.8 per cent as the policy stimulus gained traction. But Barclays Capital said the rebound might take longer, until the second half of next year when GDP growth would pick up to 7.8 per cent.
But Liu suggested that massive stimulus was impossible. "The increased credit supply is still seriously short of the rate of local government investment," he said.
In addition, the fiscal strength of local governments has weakened this year, particularly in second- and third-tier cities harder-hit by the economic slowdown.
In the first eight months, national fiscal revenues expanded 10.8 per cent, the slowest rise since 2002. Meanwhile, land sales dropped 21.8 per cent to 1.56 trillion, according to China Credit Rating senior analyst Huo Zhihui.
The cooling property market has meant that local governments have found it increasingly difficult to sell land at good prices. CICC economists said land sales at some third-tier cities "have basically stalled" this year. For example, in Xiangtan, Hunan, there had been no land transactions this year because of falling property prices, they said.
According to CICC, officials at the NDRC's Hubei branch said the province's major projects had an average funding gap of 300 million yuan, showing that major financing difficulties remain.
JP Morgan chief China economist Zhu Haibin said some of the projects unveiled by local governments "may never be implemented due to funding difficulties". The peak for investing in infrastructure projects could be over too, particularly in the eastern coastal regions.
Meanwhile, Beijing has suggested that a surge in economic growth is not desired by China's upcoming new leadership as they pledged to move towards a more balanced, sustainable growth model.
Citigroup said in a research note that most of the new infrastructure projects are believed to be in China's central and western regions, with provinces such as Zhejiang "already well built-out in terms of roads and railways".