Regional governments across China are evading borrowing limits by transferring assets on to the books of local investment companies to lower their official debt-to-asset ratios, according to executives and officials.
The practice has allowed local government finance vehicles to raise more money for infrastructure and other construction projects. But analysts warn that many of the assets are of poor quality, setting the stage for a surge in bad debts after a wave of bond defaults at government-backed companies in recent weeks.
“Many of our assets do not generate much economic value,” Liu Pengfei, president of Taiyuan Longcheng Development Investment, an LGFV in the northern city of Taiyuan, said at an investment conference this month. “The Taiyuan government gave them to us so we can meet [the debt-to-asset] requirements set by our creditor banks and bond investors.”
TLDI used to focus on infrastructure projects. Now, it is a large, diversified operator of everything from parking facilities to tourist attractions, many of which are barely staying afloat.
According to public records, the total assets of 960 large LGFVs that regularly disclose financial results rose 40 per cent over the past four years. Their revenues and net income, however, increased just 6 per cent and 4 per cent respectively.
“A Rmb100bn [$15.3bn] company won’t be less likely to default on debt than a Rmb10bn one just because of a difference in size,” said Bo Zhuang, chief China economist at TS Lombard, a research group.
The surge in acquisitions looks set to continue as local governments look to LGFVs to boost the economy in the wake of the coronavirus pandemic. The Shaanxi provincial government said in a statement in October that it would transfer “as many assets as possible” into LGFVs so they could double their borrowing over the next two years. The measure would “effectively eliminate government debt risks”, the government added.
“The bigger we are, the more we can borrow,” said an executive at Yan’an City Construction Investment Corp, another Shaanxi-based LGFV.
The executive said YCCIC has been given dozens of state-owned businesses by the Yan’an municipal government since 2018, ranging from hotels to water treatment plants. Most of them struggle to turn a profit.
Nevertheless, the executive added, YCCIC was able to borrow more because its bigger size had translated into a better credit rating, which was raised one notch to double A plus in October. Over the past two years, YCCIC’s outstanding bank loans have more than doubled.
Many local governments had previously given their LGFVs valuable land for free in order to boost their borrowing capacity. But the practice has been banned by the central government, forcing local governments to resort to transfers of lower quality assets.
Chinese banks, the biggest lenders to LGFVs, are comfortable lending to bigger government-owned investment companies even if their underlying asset quality is deteriorating.
“We have an obligation to support government-controlled enterprises as long as they meet the basic financing requirements,” an executive at Bank of Xi’an said.
Rating agencies, on which LGFVs rely to gain access to the bond market, are also generally supportive. An executive at China Chengxin Credit Rating Group, one of the country’s largest, said the company was paying more attention to total assets than profits or cash flow. “The injection of government-controlled entities, whether they are profitable or not, into LGFVs is a sign of state support,” said the official. “That’s a plus for their credit rating.”
Some investors, however, are not convinced that the LGFVs’ acquisition spree will make them less likely to default.
“The expansion of LGFVs’ balance sheets won’t make credit risks go away,” said Dave Wang, a Shanghai-based fund manager who specialises in buying LGFV debt. “They may break out at a later date, on a bigger scale.”
Some LGFV executives said they were aware of the potential risks as they seek to build more market-responsive businesses.
An executive at Jiangdong Holding, an LGFV in the central city of Ma’anshan, said his group had acquired two smaller peers and wanted to emulate Temasek, the Singaporean state-owned investment group, even if it could not match its return on capital for the foreseeable future.
“Temasek has enjoyed an annual investment return of 16 per cent for many years,” he said. “We would be happy with 1.5 per cent.”
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
