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REITS, Equity Transfers To Raise Funds, Cut Debt
A multi-billion-dollar stake sale by the world's largest distiller may prefigure further asset disposals by China's local governments, as they struggle to pay off record debts swollen to at least a fourth of national gross domestic product by emergency pandemic spending, government advisors told MNI.
In December 2020, Kweichow Moutai Group, known for its prestige-brand fiery baiju grain liquor, said it would transfer part of its controlling stake, worth about CNY92.5 billion, to Guizhou State Asset Management, a provincial government-backed investment vehicle, helping to alleviate the province's debt payment pressures.
Other local governments are also likely to accelerate efforts to dispose of assets, as well as to introduce new investment products and partnerships to raise funds at a time when the economy is expected to rebound from the pandemic and print a growth approaching 9% this year.
While few local governments have assets as valuable as Moutai, other possibilities for raising money include the introduction of real estate investment trusts (REITS) and public-private partnership (PPP) projects, or stake-sales in state-owned companies.
Fresh bond issuance could also be used to cover maturing debt, said He Daixin, deputy director of the Financial Research Office of the National Academy of Economic Strategy at China Academy of Social Sciences.
The country's first batch of REITS is expected to be approved in the first half of the year, said an advisor who asked for anonymity. Unlike elsewhere, these will be linked to infrastructure assets such as highways and utilities rather than real estate.
The ratio of local governments' outstanding debt to fiscal revenue should surpass 100%, an international red line, for 2020, from about 82.9% in 2019 after unprecedented efforts to counter the impact of the pandemic, a Ministry of Finance official said in July.
Outstanding on-balance-sheet local government debt swelled to a high of CNY25.6 trillion as of end November 2020, MOF data shows. In 2015, when the central government started to allow provincial-level governments to issue bonds for funding, the total was just CNY15.4 trillion. According to IMF, as of the end of 2018, the off-book debt of China local government reached CNY30.9 trillion. Adding this part, the debt of local government would take half of the total over CNY100 trillion GDP of the country.
Local governments face lower growth of fiscal revenue but the need to spend is still strong as China's longer-term growth trajectory slows, He said, adding that authorities urgently need to clarify doubts over some local government's actual levels of debt and figure out current fiscal resources in hand.
Some districts may now have a debt ratio of 300%, said Wang Zecai, director of Government Performance Evaluation Research Central at the Chinese Academy of Fiscal Sciences (CAFS), who is concerned that fiscal revenue growth may drop by about 5% fall in growth for 2020.
National authorities have already chosen tens of heavily indebted counties to pilot repayment of debts, which include unofficial off-balance sheet borrowing by local government funding vehicles, Wang noted. Regulators will also strictly scrutinise fresh debt to ensure it stays within quota limits and the funds are used regularly and effectively, he added.
The country has managed to swap about CNY15 trillion off-the-book local government debt for lower-interest and longer-term on-the-book government bonds since 2015, when the swap scheme was launched.
The traditional method of local governments raising funds via their vehicles has become unsustainable, said Liu Yuanchun, vice-president of the Renmin University of China and a prominent advisor to the authorities. The recent debt defaults of local-government-owned companies also indicates the debt issue in some places has become a "headache."
Further debt swaps will depend on whether local governments make their debt sustainable in the next few years, Liu said. The underlying cause for the rising debt load is the discrepancy between the limited fiscal rights of local governments and their enormous fiscal responsibility, which can be fixed by reforming the fiscal mechanism, he said.
Wen Laicheng, a professor of fiscal science at the Central University of Finance and Economics, said the authorities could increase debt-raising quotas or fiscal transfer payments for local governments in trouble, particularly for debt raised by local government funding vehicles for public welfare projects.
He Daixin said the cost for local governments to issue new debt has been getting lower and their duration has been longer in recent years, which is helpful for them to make debt sustainable. As of end November, 2020, the average maturity of local government debt was 6.9 years, with an average yield of 3.51%, according to the MOF.
Key, though, to securing the financial future of China's local governments will be more central scrutiny of their borrowing in future, Wang noted.