… into a hole, that is.
So, China’s Golden Week was not as great for property sales as it usually is. Sales were down 32 per cent on the previous year in 20 major cities, Bloomberg tells us. Which has prompted a big fall for some property developers and financials, dragging down the Shanghai Composite and Hang Seng.
Reuters has taken a long look at the problems faced by some of China’s local authorities. According to Chen Jun, a director at Chengdu Communications Investment Group, which built a giant version of Waterloo Station:
“We’re still unable to reflect on our accounts the problems that may arise from our investments into Chengdu’s railroads,” Chen said. “What happens next is that we may face some trouble repaying our loans when many of them come due.”
Chengdu Communications had liabilities of 18.9 billion yuan at the end of 2010 against current assets valued at 11.7 billion yuan.
Chen is not unduly concerned. He thinks he has a solution, one local governments across China have also grasped: Real estate. Chen, the chairman of six other state companies in the city, intends to build huge residential and commercial projects around stations such as Waterloo — with borrowed money, of course.
Meanwhile James Kynge, author and editor of the FT’s China Confidential service, has come out with a doomy-ish oped in today’s FT. He writes:
At no time over the past three decades of “reform and opening” has Beijing’s control over the supply and price of credit in its economy been so tenuous. The reasons for its enfeebled position derive from the state-centric nature of its 2009-10 stimulus. They also help explain why a repeat would be hard to pull off.
Kynge says that the shadow banking sector has now overtaken the formal banking sector for credit issuance, and therein lies the problem for the CCP: it’s not clear how these lenders — the most well-regulated of which are trust companies — will respond to government attempts to rein in expansion.
Back to those falling property prices. Credit Suisse property analyst Jingsong Du told Bloomberg that developers had so far been holding off reducing their prices, but a turning point appears to have been reached. They are of course not helped by restrictions on speculative buying, put in place by a central government nervous of inflation and housing affordability. Which all means that many indebted local governments can’t continue to count on crazy high prices for land sales.
Turns out there is a solution at hand: let local authorities issue debt independently, but only for projects under construction. From Xinhua:
HANGZHOU – Government of China’s eastern Zhejiang province will issue 8 billion yuan ($1.25 billion) worth of bonds to fund infrastructure this year, as part of a trial program of the central government to allow local governments to sell bonds directly.
The issuance, consisting of 50-percent three-year bonds and 50-percent five-year bonds, has been ratified by the central government, according to the provincial government.
The money will be used to fund city-level and county-level infrastructure projects that are under construction, especially low-income housing projects, said Qian Juyan, head of the Zhejiang Provincial Department of Finance. New projects will be strictly controlled from getting the fund.
It is unclear when exactly the government will issue the bonds. However, it is a beginning of a shift in how local government’s projects are financed.
(That’s Zhejiang, the prefecture of Wenzhou, the premier city for shadow banking). Three other regions will also take part in the trial.
The question is, who will invest, and at what rates? As FT Tilt’s Denise Law noted on Friday, appetite for debt backed by the central government has already been waning, with a couple of bond issues not getting enough coverage.
Wei Yao at SocGen says it’s a small but significant shift:
The burden will be gradually shifted away – but not reduced – from banks to the general financial market. We foresee insurers and pension funds will eventually own a significant share of local government debt.
However, for that experiment to work, she notes, the local governments will need to be a lot more forthcoming about their financial status than they have been so far.
China’s shadow banking sector needs a bail-out, says SocGen – FT Alphaville
Moody’s warns on China’s local debt – FT
Waiting for a Chinese local debt disaster – FT Alphaville