Chinese cities dive back into debt to fuel growth even as defaults rise

Fri Apr 29, 2016 6:57am EDT
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By Nathaniel Taplin

SHANGHAI (Reuters) - With a nod from Beijing, China's local governments have embarked on a massive new round of off-balance sheet debt financing, underpinning a fragile pick up in the economy but raising red flags on financial stability.

The increased borrowing for an economy already swimming in debt adds to concerns about growing bubbles in certain major asset classes, such as real estate and commodities, and a bond market seeing a rise in corporate defaults.

Economists say increasing public sector investment – most of it financed locally with debt – is behind improvements in China's economy. First-quarter GDP rose at the weakest pace in seven years, but other data suggested growth was picking up in March.

"With new infrastructure projects effectively all funded by debt and more consumer mortgages, the leverage problem and risks on the financial sector are rising," Credit Suisse analysts wrote in a research report.

Local government financing vehicles (LGFVs), which Chinese cities use to circumvent official spending limits, raised at least 538 billion yuan ($83 billion) in bonds in the first quarter, up 178 percent from a year earlier and the highest quarterly issuance since June 2014, Everbright Securities said, quoting figures from privately held financial data provider WIND.

Issuance in March alone was a monthly record of 287 billion yuan ($44.3 billion).

China's planning agency, the National Development and Reform Commission, declined to comment on the sharp rise in LGFV issuance. Most of the LGFV debt in the first quarter was made up of so-called enterprise bonds, which the NDRC oversees.

Beijing had been trying to move LGFV debt on to municipal balance sheets via the 2014 creation of a municipal bond market. But policymakers retreated from this in the middle of 2015, easing borrowing restrictions as economic growth stumbled.   Continued...

The junction of Yangtze River and Jialing River is pictured in Chongqing, China, January 25, 2016. Picture taken January 25, 2016. REUTERS/Sue-Lin Wong/File Photo