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Ye Tan: China's Local Debt And American "Two Bedroom" Debt Are Brothers.

2010/6/25 19:10:00 53

   Although the Audit Commission is under tremendous pressure, China's economic data are being questioned, but we still need to applaud more and more open audit results. After all, openness is a step closer to accuracy, leaving the big regulatory step.


The Audit Commission disclosed local government liabilities, showing two hidden dangers of local debt.


First, the local debt ratio is too high and the new liabilities are increasing. Through the audit survey of 18 provinces, 16 cities and 36 counties, the balance of government debts in these places was as high as 2 trillion and 790 billion yuan as at the end of 2009, and the debt balance formed before 2009 was 1 trillion and 750 billion yuan, which added 1 trillion and 40 billion yuan in that year. 7 provinces, 10 cities and 14 counties were over 100%, the highest reached 7.


Secondly, the efficiency of financial use is low and the debt principal and interest can not be repaid. Of the new debts, only 8.92% are used for supporting the central government to expand the new investment projects of domestic demand, and a considerable part is used to build transportation, municipal and other infrastructure facilities which have been started before 2008. In other words, borrowing is mainly used for investment in infrastructure projects, and this part of the investment can not generate revenue. This is evident from the chain of borrowing new debts to repay old debts: from the sources of debt repayment funds, these areas in 2009 were able to repay the debt principal and interest by borrowing 274 billion 546 million yuan, accounting for 47.97% of their total debt service, and the solvency of financial funds was insufficient. For a long time, local governments could not repay the principal and interest of banks, and a tide of bad debts in the form of a local debt may come.


Generally speaking, the way to resolve local debt risk is to continue borrowing or increase the investment income of debt. In 2009, for the first time, China issued 200 billion yuan of local bonds nationwide, and interest rates were determined through market tendering. Owing to indirect credit provided by central finance, credit and interest rates were close to national debt. This year, the first phase of the local government bonds was 28 billion 600 million yuan and the second period was 15 billion 200 million yuan, and interest rates were issued in June 21st.


It is probably the general trend to continue issuing local debt and expand the scale of bond issuance. Attention must be paid to the existence of institutional traps for the issuance of local debt in China. The scale of local debt issuance is small. More importantly, local debt has not been effectively monitored. The larger the scale of debt issuance, the greater the risk of future debt risk and even the possibility of a debt crisis.


From the institutional point of view, our country does not allow the local "debt management" to be issued by the Ministry of finance. This is equivalent to endorsing the local debt with the credit of the central finance, and the local debt can enjoy low interest in the garbage level of the market.


The use of local debt is even more problematic. The Ministry of Finance clearly stipulates that the scope of investment funds shall mainly include: affordable housing projects, rural livelihood projects, social undertakings, post earthquake reconstruction projects, all investment projects that can be raised through market conduct, and recurrent expenditure and office buildings. The stipulation is whether it can be implemented or not. The audit results of the Audit Commission have proved this point, and most of the funds have gone into old infrastructure projects. What we want to ask is, if there is no large-scale expansion of credit and currency in 2009, will most of the infrastructure projects started to start work will be a half baked project?


China's local debt is very similar to the "two room" bond of the United States. It has the traces of marketization operation on the surface, while the issuer implies that there is a central financial guarantee, and investors are willing to pay lower yields on the implicit guarantee. Once there is a crisis in the two houses, there will be a cruel reality: "two housing" delisting, the rating of bonds has declined, and the value of bonds in the hands of investors has shrunk. Bat bonds, which are between market and administration, are bound to generate huge moral risks and market risks. China's local debt should jump out of the "two housing" mire, act in accordance with market rules, modify the law to allow local issuance of bonds, and pass the market rating by investors at their own risk.


There are many financing channels for local governments to sneak out of their old positions. Apart from local debts, there are also city investment bonds. As a quasi municipal debt, city investment bonds are mainly used for the construction of urban road network projects, municipal infrastructure and public service projects. However, the main body and bond relationship of domestic city investment bonds are confused, even with "insufficient money and grading".


Another main financing channel is financing platform companies all over the country, and government debt accounts for more than half of the debt of the level. There are 307 financing platforms in 18 provinces, 16 cities and 36 counties audited by the Audit Commission, with a total government debt of 1 trillion and 450 billion yuan, accounting for 44.07%, 71.36% and 78.05% of the total government debt at the provincial, city and county levels respectively.


Whether they are local bonds, city investment bonds or local investment and financing platforms, they are marketization signboards, non market oriented projects, lack of supervision over investment projects, so that they can enjoy the overestimation of overestimation and overestimation of assets, so that they can repay their principal and interest with financial subsidies and new bank loans. Investors will treat local debt with national debt, and local debt will finally escape the debt siege under the name of marketization.


The credit system of the local debt system is not clear. The incentive mechanism can not distinguish between the honest and dishonest debt entities, and regard the debt and financing qualification as the impoverished subsidy to the local governments. Ultimately, it can neither improve the level of social security nor develop a healthy bond market. China's local debt and American "two housing" debt belong to sibling brothers.

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