Faced with a mountain of maturing loans this year, China has given local governments the go-ahead to issue bonds as a way of rolling over their debt to avoid defaults.
The announcement by the National Development and Reform Commission, a top central planning authority, is the most explicit official endorsement of a massive debt refinancing operation that has become unavoidable and is already underway, analysts said.
The need for the rollover highlights the tricky balance that Beijing must strike as it tries to rein in debt without triggering a sharp downturn in growth.
Local government debt levels have soared 70 per cent to almost $3tn in less than three years, according to an official audit published on Monday. Nearly 40 per cent of that overall amount will mature before the end of this year, placing huge pressure on local governments to come up with the cash to make repayments.
With many of the original loans used for infrastructure projects that have yet to generate revenue, rollovers have long been seen as one of the few viable options for preventing defaults. Regulators have quietly allowed rollovers in the past while still discouraging them in public comments, fearful that cities and towns would exploit them as an easy way out of their debt troubles.
But the NDRC’s announcement makes clear that Beijing is now willing, on the record, to support rollovers for the so-called financing platforms owned by local governments.
“If construction projects face funding shortfalls and there is no way of completing the project to realise expected revenues, we will consider granting permission for these platform companies to issue an appropriate amount of new debt,” it said. “The funding that is raised can be used to ‘borrow new and repay old’ and for incomplete projects, ensuring that they will not end up half-finished.”
The NDRC said bonds would also help local governments reduce their financing costs because they could be issued at lower rates and for longer maturities than some of the short-term high-interest loans relied on in the past.
“Previously, rollovers were seen as a negative thing,” said Shuang Ding, an economist with Citi. “But in the meantime it has been happening and there is no way of avoiding it.”
He added that the move to refinance debt via bonds was a positive development for China because bonds are more transparent than loans, would clarify repayment responsibilities and would spread risk from banks to the capital market.
In practice it is evident that rollovers have already occurred in China on a massive scale. This week’s audit noted that 60 per cent of debt was to mature before the end of 2015.
However, according to a 2010 audit, more than 50 per cent of debt was to mature before the end of 2013. The implication is that the vast majority was not paid back but simply refinanced.
Yet even with the NDRC’s permission, market conditions could make rollovers tougher for local governments. As the amount of debt in the Chinese financial system has steadily increased, the cost of issuing new bonds has risen.
The yield on top-rated AAA corporate bonds has soared about 200 basis points to more than 6 per cent over the past half year. “Refinancing will be more expensive and challenging,” said Kevin Lai, an analyst with Daiwa Capital Markets.
The NDRC statement was issued late on December 31 but it was only on Thursday that Chinese media drew attention to the government’s change in stance.
分析人士表示，由中国最高中央规划机构——国家发改委(National Development and Reform Commission)发布的这一声明，是对大规模政府债务进行再融资操作最为明确的一次官方背书。目前，这种再融资操作已不可避免，甚至已在进行之中。
2013年下半年，顶级公司债券的收益已飙升200个基点，超过6%。大和资本市场(Daiwa Capital Markets)的分析师赖志文(Kevin Lai)说：“目前再融资是高成本、高挑战。”