How one city’s borrowing practice highlights China’s daunting financial risks
In Xingyang, communist party and court buildings were used as collateral for 800m yuan bond
China’s finance ministry was technically correct when it reacted to a sovereign debt rating downgrade in May by saying the debts of local government financing vehicles (LGFVs) and state-owned enterprises would not swell the government’s contingent liabilities.
But on the ground, where it’s practically impossible to separate the debts of China’s tens of thousands of LGFVs from local authorities themselves, the situation is very different. Local government debt remains a key risk for China’s economy and financial system despite Beijing’s repeated efforts to contain it.
That’s certainly the case in Xingyang, a suburban county of 600,000 residents in Zhengzhou, the capital of Henan province.
In 2014, Xingyang’s LGFV obtained National Development and Reform Commission approval to sell 800 million yuan (US$130 million) in bonds. The seven-year bond was issued by Xingyang Urban Investment and Development, which on paper was a corporation but in reality was a local government unit.
On the surface, the bond looked just like a corporate bond. It had a corporate issuer, a double A credit rating, an auditor-endorsed financial statement, and a long and seemingly complete prospectus.
LGFVs were designed to build or operate public welfare and infrastructure projects, and the Xingyang bond was issued to raise money to build factory premises to rent out and to clear land for sale. It was guaranteed by 10 plots of land with combined value of 1.6 billion yuan, or 200 per cent of the bond value, according to the prospectus published on the Shanghai Stock Exchange in 2014.