China’s Local Governments Really Want To Default On Their Debts29 June, 2011, 5:28. Posted by Zarathustra
Tags: Debts, Economy, Local government
Following on our coverage on the Chinese local government debts, we now have more details emerging from China on what is actually happening.
After we mentioned the first case of attempted default by a local government financing vehicle (LGFV) in Yunnan, the latest casualty appears to be an LGFV of the Shanghai local government according to Hong Kong Economic Journal. According to the report, one investment company under the Shanghai government, which focuses on real estate and highways developments, appears to be unable to repay its short-term loan to the bank since earlier this month. This LGFV has requested their banks to extend the maturity of the loan into long-term loans with fixed-asset collaterals, effectively defaulting on its debt. The proposed collaterals, curiously enough, are government buildings and highways, which are pretty worthless as far as the banks are concerned.
This investment vehicle has been investing in various infrastructures between late 2008 and 2009, raising huge amount of cash from debt market as well as banks. First batch of loans are maturing this year, and it is now unable to repay.
The case is not hugely dissimilar to the Yunnan case mentioned earlier, in which the LGFV in question has been investing hugely on highways infrastructures. That LGFV has requested banks to allow itself to repay interest but not principal, effectively another attempted default, although the government finally averted the default, for now.
As a reminder, the highest estimate available for the LGFV debt was produced by the People’s Bank of China, which says the LGFVs debt can get as high as 14.4 trillion Yuan. Using the method recommended by Professor Victor Shih, the total local government debts can get to 20 trillion Yuan or more, which would be roughly 50% of China’s GDP. Please also be reminded that if we add other government debts, the total debt-to-GDP ratio will get very close to 90% of China’s GDP. Worse still, no one can be confident about any numbers at all.
So far, the Yunnan and Shanghai cases of attempted default are described as “not the worst ones”. As the local government debts drama unfolds, together with the continuous economic slowdown and monetary tightening, be prepared to see more of these cases emerging in the next few months.