MNI: China Eyes Dirty Industry Bailout To Limit Bond Defaults

China is considering a large-scale injection of public funds into dirty industries due to be phased out to meet climate targets, reducing default risk among companies with hundreds of billions of yuan in outstanding bonds with upgrades to cleaner technology and helping obsolete plants keep up debt payments during their remaining lifespan, policy advisors told MNI.

Local governments in the major coal-producing regions of Shanxi and Inner Mongolia have been instructed to set up trials, with possible approaches including seeking private partners to purchase and convert outmoded plants with low-carbon technology. This would allow them to partly recover the cost by providing electricity at peak hours when green energy supplies are insufficient to meet demand, said Fu Sha, director of the Low Carbon Economic Growth Program at Energy Foundation, which is supervised by the National Development and Reform Committee.

While such trials may only require a few tens of billion of yuan in the initial stages, they could be broadened out throughout outmoded industries as China upgrades in a bid to meet its pledge to peak carbon emissions by 2030 and to become carbon neutral by 2060, Fu said.

The State Assets Supervision and Administration Commission, created in 2003 to centralise control over state-owned enterprises, could also purchase carbon-intensive power plants and other infrastructure which have remaining life, said Yang Fuqiang, a senior researcher with the Institute of Energy at Peking University.

RACE FOR APPROVAL

Coal power plants accounted for more than 60% of total Chinese power generation at the end of 2020, with 474 of them, many loss-making, operated by the big five state-owned power groups as of 2018. The country's electricity companies had CNY1.78 trillion in bonds outstanding by November 2020, according to China Lianhe Credit Rating.

The default rate for coal power companies could jump to about 22% in 2030 from 3% in 2020 due to falling demand, rising financial costs and price competition, according to a recent estimate by former People's Bank of China Monetary Policy Committee member Ma Jun. Government funds, and asset restructuring including mergers could help mitigate this increase in delinquency, Fu said, noting that without help coal companies will find it increasingly difficult to borrow from bond markets and even from banks.

President Xi Jinping has promised China's coal power generation will peak in 2025, but renewable sources still only account for 29.5% of the country's electricity, with less than 10% coming from wind and solar energy. This has prompted some local governments to race to get as many coal-based power plants approved as possible before the deadline, advisors noted.

Yang warned coal plants built during the next few years risk being shelved before they have time to recoup their cost, and that government support is essential. But smaller plants with capacity of under 300 megawatts and those which have already paid for themselves will be shut down, he said.

TRANSFER PAYMENTS

In addition to providing funds to support obsolete plants, the central government may also have to increase transfer payments to local governments to compensate for what could be a sharp drop in local tax revenue in coal-dependent provinces, said Fu. The mining, power and construction industries accounted for as much of 48% of revenue in Shanxi, a report by Sequoia Capital showed.

The government could also compensate for lower coal output by boosting prices for the commodity, in another effective subsidy, one of the advisors said.

China has promised to boost its renewable energy installed capacity to 1.2 terawatts by 2030 from about 530 gigawatts by the end of 2020. But renewable generation can vary according to the weather, and coal-based power plants still provide a back-up.