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MNI EXCLUSIVE: Chinese Banks Buying Off-Balance Sheet Debt

     BEIJING(MNI) - Chinese banks are buying more debt from local government
funding vehicles amid a shortage of investable assets at a time when central
bank easing has given lenders access to ample funds, helping relieve short-term
pressure on regional administrations' finance, Chinese policy researchers said.
     LGFV bond issuance had totaled CNY2.5 trillion so far this year by Oct. 16,
compared with CNY2.48 trillion in all of 2018 and on track to exceed 2016's
record CNY2.57 trillion, according to Wind, a financial data provider. Many of
these bonds have been bought by banks.
     Even though LGFVs, which fund local government projects, are
off-balance-sheet vehicles, investors regard their bonds as officially backed.
Together with their stable returns this makes them attractive to banks and other
institutions at a time when measures to prevent property market overheating and
volatility in equity markets has left them with a reduced universe of assets
from which to buy, said Wang Zecai, senior research fellow at Chinese Academy of
Fiscal Sciences, a Ministry of Finance think tank.
     But, while LGFV bonds are seen as comparatively safe, given that defaults
have been rare, and three People's Bank of China reserve requirement cuts this
year have given banks access to additional funds to invest, researchers point to
reasons for caution.
     Local government's total implicit debt may be as much as CNY40 trillion,
with over 80% of that in funding vehicles, according to China Chengxin
International Credit Rating, affiliated with Moody's. In 2019, 70% of funds
raised by LGFV were used to rollover existing debt. LGFVs face a spike in
repayments over the next three to four years, with an average of more than CNY2
trillion coming due a year.
     Authorities should apply more scrutiny to projects financed by LGFVs in
order to ensure that local governments' implicit debt does not continue to grow,
Wang said. While banks' purchases of LGFV bonds allow the vehicles to continue
to refinance, their debt levels are high, he said.
     Amid calls by some for reform of the funding vehicles, the national
government has started to issue bonds to swap out LGFV bank loans associated
with zero-return public welfare projects, said Wang Wenxiang, deputy director of
the National Development and Reform Commission's Institute of Investment
     But market-oriented reform of the LGFVs will impossible under their current
debt loads, he said, calling for regulators to accelerate mergers between
vehicles. Some city- and county-level LGFVs lack the expertise to function
efficiently, Wang said.
     Channeling private investment into some local projects is also an option,
backed by credit guarantees from local governments, Wang suggested.
     Zhao Quanhou, director of the financial research center at the CAFS. But
softening general government revenue, whose growth dipped to 3.3% in the first
nine months of 2019, compared with a target of 5.5% for the year, and increasing
spending requirements on local governments due to the economic slowdown, have
reduced the scope for this, Zhao noted.
     In the meantime, banks will continue to support LGFVs by purchasing their
debt, or lending to them, Zhao said. This will require the PBOC to continue to
provide ample liquidity and keep the lending rate low.
--MNI London Bureau; +44 203 865 3829; email:
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