[January 07, 2023]After three years of zero epidemic prevention, China’s local finances have been exhausted, and the local debt crisis has become more and more serious. A few days ago, China’s bond circle has caused a wave of sensation, because the largest city investment bond issuer in Zunyi City, Guizhou Province – “Zunyi Road Bridge“, announcing that the bank’s debts will be extended for 20 years. As soon as the news came out, it was considered to be the first gun shot by the CCP to grab money in the New Year. Then, why did this news cause such a big response? Some analysts believe that this is tantamount to a What is the reason for opening the door to the “disguised debt”? What does it mean for the Chinese economy? Let’s talk about these contents today.
Zunyi Road BridgeBanks are forced to accept the “overlord clause”
On December 30, 2022, Zunyi Daoqiao Construction (Group) Co., Ltd. issued an announcement on the China Bond Information Network to promote bank loan restructuring. The announcement stated that this bank loan restructuring involves a debt scale of 15.594 billion yuan (the same below). After the restructuring, the bank loan period will be adjusted to 20 years, and the annual interest rate will be adjusted to 3% to 4.5%. In the first 10 years, only interest will be paid and the principal will not be repaid. , and repay the principal in installments over the next 10 years.
As soon as the news came out, it was like a shock bomb was dropped in the financial circle. As an industry insider said, it is not uncommon for urban investment companies to extend their loans, but such a long extension of 20 years is unprecedented.
why? Because the loan of 15.6 billion yuan was extended for 20 years at once, and only the interest was paid in the first 10 years, and the principal was repaid in installments in the next 10 years, the interest rate was also reduced from the original 7.5% to 3% to 4.5%. , is definitely not a small loss, and it is still unknown whether the money can be repaid in the distant 20 years. Therefore, Zunyi Daoqiao’s move is actually to renege on the debt.
However, the bank has suffered such a big loss, why should it accept it? More than one bank creditor told the media that Zunyi Daoqiao proposed such a condition, which was suppressed by the creditor committee, and the bank had to pass it. That is to say, the bank is under pressure and has to accept it, because Zunyi Daoqiao is an urban investment company, an investment and financing platform established by the local government through financial allocation or injection of land, equity and other assets.
According to public information, Zunyi Daoqiao is one of the four major state-owned enterprise groups in the city, and is mainly responsible for highway construction, urban infrastructure construction, real estate development and land consolidation in Zunyi City. From the perspective of equity structure, the controlling shareholder of Zunyi Daoqiao is the Zunyi City State-owned Assets Supervision and Administration Commission, which holds 100% of the shares, and the actual controller is the Zunyi City Government.
In addition to the pressure from the government, another reason why banks can only accept losses is that if they do not accept, the debt will be non-performing loans, and the financial statements will be ugly. As a financial person said to “China Business News”, the extension is not like a default, at least it will not affect the bank’s bad debt ratio.
But the problem is that although bank loans can be extended, Zunyi Daoqiao still has non-standard financing. Non-standard financing refers to “non-standard bond financing”, wealth management products issued through channels such as trust, private placement, and asset management, which are different from standardized debt assets traded in the inter-bank market and stock exchange market.
As of the end of June 2022, Zunyi Road and Bridge’s interest-bearing liabilities had a balance of 45.754 billion yuan. Except for the 15.594 billion yuan in bank loans restructured this time, Zunyi Road and Bridge still had a large number of non-standard debts such as trusts. How to resolve it has also attracted much attention.
Zunyi Road and Bridge had non-standard overdue as early as the beginning of 2020. On January 10 of that year, Zunyi Daoqiao failed to pay the repurchase price of 39.5 million yuan of accounts receivable creditor’s rights on schedule. Finally, under the coordination of the local government, the payment was postponed for 5 days. “Leju Finance” also reported in September last year that the trust projects of several urban investment platforms in Zunyi had substantive defaults, including Zunyi Daoqiao.
“Daily Economic News” quoted a person in the bond industry as saying that banks can adopt a 20-year extension of the debt reduction plan, and even increase a certain amount of loans to the platform every year to improve operations, etc., but other debts cannot be compared. If you are an individual investor, you will definitely not be able to accept this arrangement.
But now, Zunyi Daoqiao wants to lose even the bank’s money, not to mention the non-standard debts that are not on the balance sheet. Moreover, the cost of non-standard financing is higher. Once a default occurs, it will be impossible to obtain financing from these channels in the future. Therefore, Zunyi Daoqiao is actually credit-bankrupt.
City investment company’s actual breach of contract releases red flags
Not only that, Zunyi Daoqiao’s bank debt extension this time also released one of the most dangerous signals, that is, breaking the so-called “Chengtou Faith“. Because in the past two decades,City Investment BondMaintain rigid payment for a long time.
City Investment BondIt is the debt issued by the city investment company. Due to low financing costs and high efficiency of capital use, urban investment bonds have become the main financing method for local governments. Data show that from 2018 to 2020, the scale of urban investment bonds issued by platform companies has increased from 2.5 trillion yuan to 4.5 trillion yuan, maintaining an annual growth rate of more than 20%.
Although urban investment bonds do not appear to be government debts, in fact they are often 100% guaranteed by local governments. Therefore, the capital market has always had a high degree of recognition for urban investment companies, believing that urban investment companies will not default in the bond market Yes, even if there is a payment risk in the short term, there is no ultimate risk, because the local government will definitely come forward to help coordinate the solution.
However, since 2018, non-standard defaults of urban investment companies have occurred from time to time, and Guizhou is currently the province with the most non-standard defaults.
According to the statistics of a researcher at the China Chengxin International Research Institute, in 2021, the non-standard default risk of Chengtou will continue to be released. More than 4 billion yuan; and the “hardest hit area” of urban investment non-standard defaults is Guizhou, which has weak financial strength and higher financing costs. 29 urban investment companies have non-standard defaults, and Zunyi with a high debt ratio has the largest number, with 13 Home.
Still, so far, Chengtou has never defaulted on standard debt. But now, Zunyi Daoqiao’s bank debt has been extended for 20 years at once, and the interest rate has been lowered. In fact, it is a “disguised default” of standard debt, so it is of great significance. Moreover, it is by no means accidental that Zunyi Daoqiao will release this signal at the end of 2022.
In fact, over the past few years, the hidden debt of local governments represented by urban investment bonds has been increasing, greatly exceeding the growth rate of GDP and local fiscal revenue. However, the reason why local debts have not exploded on a large scale is mainly because the prosperity of the real estate market has stabilized land prices, allowing local governments to resolve debts through land sales revenue. But now, the land transfer income of local governments has dropped sharply, and they are no longer able to “pay” for these debts.
Economists at Goldman Sachs Group stated in a report released in September 2021 that the total debt of China’s local government financing vehicles (LGFV) has grown to 53 trillion yuan by the end of 2020, equivalent to 52% of China’s GDP. % and higher than the official total outstanding government debt. The report argues that Beijing needs to be flexible in handling the issue, as local finances are already under pressure from a slowdown in land sales.
Therefore, the CCP government has always emphasized the need to “strictly control hidden local debts.” Because if the scale of debt exceeds the bearable range of the economic system, it will not only exacerbate local fiscal imbalances, increase the risk of the financial system, and even lead to systemic fiscal and financial risks.
However, in the past three years, due to the outbreak of the epidemic in various places in China, the government’s epidemic prevention expenditure has increased significantly, but tax revenue has decreased, coupled with a sharp drop in land sales revenue, land transfer revenue has dropped by 26% year-on-year in the first 10 months of this year, so it is in serious trouble. fiscal deficit. According to Bloomberg’s analysis, in the first 11 months of last year, China’s fiscal deficit, including the deficit of the central and local governments, was close to 7 trillion yuan.
Two months ago, Zhao Wei, the chief economist of Shanghai-based Best Securities, estimated that the fiscal deficit of the Beijing authorities may exceed 10 trillion yuan in 2022, the highest in history, which has already exceeded the warning line.
In particular, Guizhou belongs to the “hardest-hit area” of local debt. According to Tencent Finance statistics, Guiyang, the capital of the province, will have a fiscal debt ratio of 929% by 2021, with total debt equivalent to 9 times fiscal revenue, ranking first among Chinese cities. As the second largest city in Guizhou, Zunyi has a financial debt ratio of over 800%.
From this point of view, the explosion of local government debt seems inevitable. It is against this background that Zunyi Daoqiao’s bank debt restructuring took place.
The government’s support for non-repayment of urban investment debts started a boom
However, Zunyi Daoqiao dared to extend the bank debt for 20 years. In the final analysis, it was because of the support of the central government. In the bank loan extension announcement, Zunyi Daoqiao emphasized that it is based on the spirit of the “Guofa No. 2 Document” and “Caiyu No. 114 Document”.
“Guofa No. 2 Document” refers to the “Opinions on Supporting Guizhou to Break New Paths in Western Development in the New Era” issued by the State Council of the Communist Party of China in January last year. “Caiyu No. 114 Document” refers to the notice issued by the Ministry of Finance of the Communist Party of China in September last year on the “Implementation Plan to Support Guizhou to Accelerate the Improvement of Fiscal Governance Capabilities and Break New Development Paths”.
Both proposed that “under the premise of implementing the local government’s debt obligations and not adding new local government hidden debts, financing platform companies are allowed to negotiate with financial institutions to adopt appropriate extensions and debt obligations for qualified stock hidden debts.” Restructuring and other means to maintain capital turnover.” “Caiyu No. 114” also proposed to “reduce the cost of debt interest.”
Therefore, Zunyi Daoqiao can also be regarded as “repudiating debts according to the law”. Hong Kong’s Hong Kong Economic Journal commented that this is “the first bucket of blood for local debt”. In essence, the CCP authorities are using Guizhou as a pilot to try to dismantle the predicament of urban investment debt. On the one hand, they require the debt-holding banks to make substantial profit concessions, and at the same time, they use “dragging tactics” to delay the problem for decades. If the debt-holding banks do not agree to the “profit transfer”, firstly, it will violate the spirit of the Central Committee of the Communist Party of China, and secondly, Zunyi Daoqiao Company will not be able to repay the debt at all, and it is very likely that it will go bankrupt, and it will be broken up in the end.
Two pieces of news from a number of mainland media on January 5 further confirmed this statement.
One is that the Ministry of Finance recently announced the letter of reply to the proposals of deputies to the National People’s Congress and members of the Chinese People’s Political Consultative Conference. It mentioned that it is necessary to safely resolve the stock of hidden debts, “adhere to the principle of no assistance from the central government”, and achieve “whose family’s children will be taken away”.
The other is that Liu Kun, Minister of Finance of the Communist Party of China, recently stated that the Ministry of Finance will further break the government’s bottom-line expectations and promote the market-oriented transformation of financing platform companies by category. According to the report of “First Finance and Economics”, this has been Liu Kun in the past two months. The second time Kun stated his position in this way, the purpose is to further break the belief in the rigid payment of urban investment bonds.
This means that the Beijing authorities will use Zunyi Daoqiao as an example to solve the urban investment debt crisis. After Guizhou, other provinces with prominent debt problems, such as Yunnan and Heilongjiang, will also quickly carry out urban investment debt restructuring, just like some As the commentary said, this new model of bad debts is unprecedented, and this is just the first shot fired by the CCP government to grab money in the New Year.
Institute of Finance, Commerce and Economics
Planning: Yu Wenming
Written by: Li Songyun
Editors: Wei Ran, Yu Wenming
Producer: Li Songyun
focus on”Financial business world“:https://bit.ly/GJEconUND
Editor in charge: Lian Shuhua