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A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hours train ride from Beijing. And like New York City in the 1970s, it may need a bailout. Debt accumulated by companies financing local governments such as Tianjin, home to the New York lookalike project, is rising, a survey of Chinese-language bond prospectuses issued this year indicates. It also suggests the total owed by all such entities likely dwarfs the count by Chinas national auditor and figures disclosed by banks. Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund. There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 trillion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt. The fact so few of the companies have accumulated that much debt suggests a bigger problem, says Fraser Howie, the Singapore-based managing director of CLSA Asia-Pacific Markets who has written two books on Chinas financial system. You should be more worried than you think, he said of Bloombergs findings. Certainly more worried than the banks will tell you. You know how this story ends -- badly, he said.
Repayment Doubts
The findings suggest China is failing to curb borrowing that one central bank official has said will slow growth in the worlds second-largest economy if not controlled. With prices dropping in Chinas real estate market, economists warn that local authorities wont be able to repay their debt
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because of poor cash flow and falling revenue from land sales they rely on for much of their income. Provinces and cities are going deeper into the red to finish projects, from the Manhattan on the east coast, to highways in northwestern Gansu and a stadium fronted by Olympic rings in Hunan, central China. Many were started as part of Chinas stimulus program to beat the 2009 world recession. The financing companies accounted for almost half of the 10.7 trillion yuan in all local government debt tallied by the official audit. The 231 borrowers whose public filings were reviewed by Bloomberg raised a combined 354.1 billion yuan by selling securities this year. They have credit lines from banks of at least 2.3 trillion yuan that have yet to be drawn down, the documents show.
Rising Lending
Bank lending continues to rise, Bloomberg found, even after Chinas banking regulator repeatedly warned banks to control risks associated with it and speed up repayment. Forty-seven of the 56 local financing companies that issued prospectuses from Oct. 1 through Dec. 10 said their debt load had increased this year. The combined debt of those issuers rose 10 percent from the end of 2010. Whats more, adding up lending by bank also raises the question as to whether Chinas lenders are understating their exposure to local government debt. Only 113 of the local government borrowers disclosed such a breakdown; and yet this small group appears to account for an outsized portion of what the banks have said is their overall lending.
Data Disparities
For example, China Construction Bank Corp. (939), the worlds second-biggest bank by market value, has lending to those 113 local government borrowers of 250 billion yuan. Thats 43 percent of the 580 billion yuan the bank said it had extended in loans to all such borrowers at the end of June. The bank has untapped lines of credit to the vehicles of a further 341 billion yuan. Disparities like this suggest lenders may have bigger risks than theyve disclosed publicly, says Charlene Chu, a banking analyst at Fitch Ratings Ltd. in Beijing. China Construction Bank said it stood by its total for loans to local governments and that cash flow from them was good. Nonperforming loans to such companies amounted to 6.5 billion yuan, or
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1.11 percent of the total, and the lender had set aside provisions of more than three times that, it added in an e-mailed response to questions. The prospectuses offer a rare window into borrowing by the local government financing vehicles. The issuers disclose total debt and often details of their loans and lines of credit from banks and trust companies. The data are not consistent, with some reporting total debt as of the end of 2009 and some as recently as Sept. 30 this year. (For an explanation of Bloombergs methodology click here.)
Loans Invested
Loans to local government companies arent a problem because the projects will generate returns, even if not immediately, said Huang Jifa, deputy general manager for investment banking at Industrial & Commercial Bank of China Ltd. (1398), the countrys biggest lender. The money that Chinese local governments have borrowed is not like the money people borrowed in Europe or Greece, Huang said in a Nov. 24 interview. The Chinese governments borrowed money is all invested. Many projects will have returns.
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The bank says it had extended 931 billion yuan of such loans as of June 30. Outstanding local government financing vehicle-loans at the end of the third quarter declined from the first half, an ICBC spokesman said. He wouldnt comment further.
Construction Boom
A building boom by thousands of local governments became the backbone of the countrys stimulus program started in November 2008 -- on borrowed money. The financing companies were created starting in the 1990s and enabled provinces, cities, counties and townships to bypass rules barring most of them from directly selling bonds. Projects undertaken include a stadium, which resembles Beijings iconic Birds Nest Olympic venue, in Jinan, the capital of eastern Chinas Shandong province; and a superhighway in the countrys second-poorest province of Yunnan that stretches into the foothills of the Himalayas, where there are no cities of more than 1 million people. In Tianjin, about 160 kilometers (99 miles) southeast of Beijing, a sea of hundreds of construction cranes stretches along both sides of the river at an oxbow that gives the Yujiapu financial district its Manhattan-like shape, testimony to the scale of Chinas ambitions. Downriver are the ruins of centuries-old forts stormed by British and French troops during the Second Opium War in 1860.
Thousands Evicted
To build Yujiapu, Tianjin officials are piling onto borrowing that is already at least almost half a trillion yuan - -equivalent to half the annual per capita income of the citys 13 million people. More than 5,000 people were moved out of the area starting in 2008 to make way for the project, among the millions nationwide evicted from homes to make way for Chinas urbanization projects. The planned 15.2 million square meters (164 million square feet) of office space by 2020 in Yujiapu and across the Hai River in Xiangluo Wan, or Conch Bay, is more than one-third of the 450 million square feet in Manhattan. One of the companies building Yujiapu -- Tianjin Binhai New Area Construction & Investment Group Co. -- sold 10 billion yuan in bonds in November. It earmarked 1 billion yuan from the sale to fund the construction of the districts transport hub, which includes a high-speed rail line that will cut the time to Beijing to 45 minutes. In the first half of the year its debt, mostly from banks, rose 11.9 percent from the end of 2010 to 71 billion yuan, according to the prospectus.
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Rockefeller Center
They include a 588 meter-high tower, taller than the 541 meter-high 1 World Trade Center currently under construction in the real Manhattan, being built with the help of the Rockefeller familys Rose Rock Group. Steven Rockefeller Jr. attended a Dec. 16 groundbreaking event for the project, which includes the skyscraper inspired by the Rockefeller Center in New York, Zhao Jia, an outside spokeswoman for Rose Rock, said. The Lincoln Center is advising on the construction of a performing arts center. Yujiapus resemblance to the Big Apple extends to its rising debt that analysts like Howie say is unsustainable. New York was near bankruptcy in 1975 after a succession of overspending administrations, before then-President Gerald Ford agreed to lend it $2.3 billion. In many of these projects, like the mini-Manhattan, its never going to make money, Howie said. Maybe the government can write a check from somewhere else. But that means education gets affected, health gets affected. Theres a cost somewhere else, because theyre wasting all these resources.
Bond Sale
Tianjin Infrastructure Construction and Investment Group Co., another state-owned builder working on Yujiapu, is the most heavily indebted local government financing vehicle in China to disclose its finances in bond prospectuses this year with 291 billion yuan in debt. It sold 3 billion yuan of bonds in April.
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An official with Tianjins foreign affairs office said no one was available to answer questions about whether the citys financing vehicles had sufficient cash flow to service their debts. The true level of local government debt nationwide is hard to ascertain because the borrowing vehicles are mostly opaque. Theres even disagreement over how many exist. The Peoples Bank of China, the countrys central bank, said in a June 1 report there were more than 10,000. In a separate study, Chinas banking regulator tallied 9,828 as of the end of Nov. 2010, according to an unpublished report cited by the 21st Century Business Herald in March.
Lending Binge
Its very likely that senior government leaders have no way of knowing which numbers provide the best picture of the evolving lending binge Chinas banks seem to be on, said Carl Walter, who retired as chief operating officer in China for JPMorgan Chase & Co. (JPM) earlier this year and is co-author with Howie of Red Capitalism, an analysis of Chinas banking system. The audit office said in an e-mailed response to questions that it counted debt that local governments have responsibility to repay, that they have guaranteed, or other debts that they may be liable for. Peoples Bank of China didnt answer faxed questions. An official with the China Banking Regulatory Commission said to use the audit offices figures. The number of loans going bad will rise because of the borrowers poor cash flow, according to a November report from London-based HSBC Plc. Around 68 percent of 184 local financing companies that have sold bonds analyzed by HSBC had a return on capital lower than 5 percent, the benchmark lending rate last year, compared with 37 percent for all 499 corporate issuers it studied, the report said.
Loan Mismatch
One of the problems with the local government financing vehicle loans issued in 2009 was there was a mismatch between the duration of the assets and the duration of the liabilities, said Michael Werner, a banking analyst at Sanford C. Bernstein & Co. in Hong Kong. If youre building a railroad or a highway, it takes several years and youre not going to get direct revenues. Take Gansu Provincial Highway Aviation Tourism Investment Group Co. The company builds roads across the arid province, including a 3.4 billion-yuan, 235-kilomter stretch of high-speed expressway along the ancient Silk Road to Jiayuguan, at the westernmost pass of the Great Wall of China.
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Its total debt surged 29 percent in the first nine months to 15 percent of the provinces gross domestic product last year. The companys entire 2010 operational cash flow was 3.04 billion yuan, while it had 55.9 billion yuan in bank borrowing reported at the end of September. The revenue wouldnt cover interest payments at Chinas standard lending rate of 6.56 percent, let alone paying down principal.
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--Michael Forsythe, Henry Sanderson. With assistance from Stephanie Tong in Hong Kong, Zhang Dingmin, Ying Tian and Kevin Hamlin in Beijing. Editors: Neil Western, Melissa Pozsgay To contact Bloomberg News staff for this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net Henry Sanderson in Beijing at hsanderson@bloomberg.net. To contact the editors responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net. Peter Hirschberg at phirschberg@bloomberg.net Shelley Smith at ssmith118@bloomberg.net
2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
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