The recent last-minute scramble by a Chinese local government finance vehicle to repay a private bond underscores the contagion risks at companies that manage municipalities' funds, according to S&P Global Ratings.
The warning comes after City Development Company Of Lan Zhou, a local government finance vehicle in Gansu province, on Aug. 29 dashed to repay a private bond. Later that night the company remitted funds to repay its 700-million-yuan private placement notes after Shanghai Clearing House initially announced the company was short.
Problems at Chinese local government finance vehicles "are set to worsen since their government owners won't be able mobilize as much resources to support the vehicles in servicing debt," Laura Li, a credit analyst at Ratings, said in a Sept. 5 report. Contagion risk is likely to increase for such entities, Li said, adding that "the liquidity crunch has been deepening for those with deteriorating access to the capital markets."
Local governments' financial health has been squeezed by falling land sales, which used to be their key revenue source. Expenses have risen at the same time.
With sentiment in the property market still weak, local government finance vehicles, which raise funds for municipal governments and manage their financial assets, face difficulties in supporting their owners. Stringent financing regulations and growing risk-aversion by domestic bond investors is making the problem worse, especially for local government finance vehicles in less developed provinces and regions.
Land acquisition by the country's top 100 real estate developers in the first half of 2022 plunged 60% from the same period last year, according to China Index Academy. Despite policy easing in the sector, recent land auctions have been so quiet that local governments have had to rely on their financing vehicles to maintain the price floor, according to Jiang Yuhui, a property analyst at Cinda Securities.
City Development is engaged in urban redevelopment, utilities and bus services in Lanzhou, the provincial capital of Gansu. A liquidity crunch at the company has been simmering since the second half of 2021, according to Ratings, mainly because it has been cut off from capital markets.
As of June 30, the company had just 1.6 billion yuan in cash and cash equivalents, against short-term debt maturities of 9.9 billion yuan, Ratings said.
As of Sept. 2, US$1 was equivalent to 6.90 Chinese yuan.
