local government Archives - the patient investor

March 14, 2024

Why China’s efforts to resolve hidden government debt could fall short | Caixin Global

Local governments make extensive use of local government finance vehicles (LGFVs) to conceal debt and present a healthy balance sheet. The hidden debt presents a major risk for central government as the economy threatens a debt-deflation spiral.

From Caixin Global, March 14 2024:

China’s central government has rolled out a new round of measures since the second half of last year to help local governments swap or restructure their off-the-books borrowing in a bid to control debt risk.

However, the sheer scale of the country’s local government hidden debt — up to more than 70 trillion yuan ($9.8 trillion) according to some estimates, more than twice Germany’s GDP — means that the measures at best are far inadequate and will provide only temporary relief to what experts say is a looming liquidity crisis for regional authorities….

December 20, 2019December 20, 2019

Cracks are showing in China’s Debt Markets

“You only learn who has been swimming naked when the tide goes out…” ~ Warren Buffett

Beijing’s de-leveraging campaign, to set the economy on a sustainable path, is starting to expose some of the excesses in financial markets.

Local Government

Local governments owe some 49 trillion yuan (about $7 trillion or 50% of China’s GDP) in off-balance-sheet debt through local government finance vehicles (LGFVs). LGFVs generate no income themselves and are reliant on revenue flows from the city government to service the debt. Local governments in the past generated substantial revenue through land sales but dwindling sales make debt servicing a challenge. Many LGFVs are experiencing cash flow problems and have resorted to borrowing in shadow finance markets to meet their commitments. Interest rates are close to 10% and will simply accelerate the inevitable implosion.

This map from Rhodium highlights the most severely affected LGFVs, where debt in some cases exceeds 30 times local government revenues:

China: City Level Financial Stress

China’s Ministry of Finance (MOF) is attempting to keep a lid on the problem, offering long-term low interest loans from China Development Bank to repay shadow financing. Zhenjiang, an eastern city of Jiangsu province was one of the first beneficiaries, in March 2019. But debt substitution merely prolongs the crisis unless the city can sell off marketable assets to repay debt. Marketable assets which are, in many cases, proving hard to find.

This detailed report from Rhodium examines the problem.

State-owned Enterprises (SOEs)

We are also witnessing a $1.25 billion default by local government-owned Tewoo Group:

“China’s Tewoo Group has forced investors to take losses on a US dollar bond, marking the largest failure to repay dollar debt by a state-owned company in two decades….The commodities trader, which is wholly owned by the city government of Tianjin, completed an exchange offer this week that made investors take significant discounts on their holdings in the company’s debt.”
“The offer was ‘tantamount to a default’, S&P Global Ratings said on Thursday.” ~ FT.com

Based out of Tianjin, Tewoo is a bulk trader of commodities such as metals (ferrous & nonferrous), energy, minerals and chemicals….

In 2017, it had a turnover of $66.6 billion with profits of $122 million and was ranked 129th in the Fortune Global 500 list & 28th in the Chinese enterprises list. The company employs more than 19,000 professionals and has operations across the US, Germany, Japan and Singapore.

Tewoo’s financial challenges are closely linked to Bohai Steel Group, a business associate which has filed for liquidation due to high leverage. Bohai’s bankruptcy in 2018 triggered systemic risk in Tianjin’s financial market and Tewoo has been facing serious liquidity challenges in recent months. ~ MoneyControl

Bank Bailouts

Many small and medium-sized banks are overly reliant on wholesale markets for funding and tightening credit has left them high and dry.
Barclays Research highlighted a number of banks that had failed to submit their 2018 annual reports on time (source Zero Hedge/Macrobusiness):

China: Troubled Banks

Baoshang Bank underwent a state takeover in May.
Bank of Jinzhou was taken over by state-owned strategic investors in July.
Heng Feng Bank was taken over by China’s sovereign wealth fund in August.
Troubled Anbang Insurance Group is selling a 35% stake in Chengdu Rural Commercial Bank to “an investment firm owned by the southwestern city of Chengdu.” (Caixin)

While, according to Caixin:

“China’s Hengfeng Bank will raise 100 billion yuan ($14.21 billion) through a private placement to a group of state and foreign investors…..The troubled Shandong-based lender will issue 100 billion shares, Hengfeng said Wednesday in a statement.”

Foreign investment is simply window-dressing, with Singapore’s United Overseas Bank subscribing for 4% of the new issue. Probably with a “put” on the other state-owned purchasers.

“The bailouts for China’s troubled small banks roll on……China’s sneaky system-wide bank bailout is well underway.” ~ Trivium China

Efforts by Beijing to curb exponential debt growth are praiseworthy, but are likely to come at a substantial cost. Expect GDP growth to slow and gradual “Japanification” as the state attempts to avoid hard choices, supporting the continued existence of “zombie” companies ……and sclerosis of the Chinese economy.

July 28, 2012

Towns Cut Costs by Sending Work Next Door – WSJ.com

Towns and cities in the US are using a novel way of cutting costs as tax revenues shrink: out-source administrative functions to neighboring towns or to local counties. Here is an excerpt from an article by Joel Millman in the Wall Street Journal:

Molalla, 30 miles south of Portland, is part of a trend spreading across Oregon among towns and cities facing fiscal crises and seeking to cut spending. The towns of Lowell and Westfir, populations 1,045 and 300, say they outsourced their traffic patrols and criminal complaints to nearby Oak Ridge, population 3,200.

Oak Ridge, in turn, closed its 911 dispatch service—which had been costing nearly $400,000 a year—by paying the Lane County Sheriff’s Department $93,000 to take its calls. Earlier this year, the city of Eugene contracted with Lane County to take over some legal work.

…Oregon’s public sector is catching up to a trend that has already taken off in some other states as cities and towns consolidate operations. Often called “service contracting,” or “service sharing,” this type of outsourcing lets cities keep the work local and maintain a connection with voters, instead of privatizing operations to a commercial venture that might be located far away.

If this idea catches on it could lead to widespread savings at town, city, county and even state level as neighbors reduce costs by sharing duplicated functions.

via Towns Cut Costs by Sending Work Next Door – WSJ.com.