China's Kunming denies debt repayment difficulties as concerns grow
THE south-western Chinese city of Kunming on Wednesday (May 24) denied market chatter that its local government financing vehicles (LGFVs) were having difficulty repaying debts, as investors become more concerned about municipal debt risks amid a weak post-Covid recovery.
LGFVs play a key role in funding Chinese infrastructure projects, one of the biggest growth drivers for the world’s second-largest economy. But some analysts say they have become the “black holes” of the country’s financial system, with surging debtloads exceeding US$9 trillion and weak revenues beginning to alarm investors.
Adding to worries about contagion, some banks have had to extend their loans to LGFVs.
The latest rumours, which circulated on social media in China on Tuesday, said some LGFVs in Kunming, the capital city of inland Yunnan province, were having “great difficulties” in paying back debts and have used social security funds and housing provident funds for repayment – a major violation of the rules.
The State-owned Assets Supervision and Administration Committee of Kunming said in a statement that the information was fake, and it had “taken legal means to protect our legitimate rights and interests”.
So far, there have been no reports of an LGFV default in public markets, and some investors say they have faith that governments will guarantee the repayment of such debts.
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A Goldman Sachs report earlier this month said inland provinces such as Yunnan and Guizhou “are more cash-constrained, and therefore more vulnerable to repayment pressures”.
“The high debt pressure has been reflected in the valuation and interest rate spread trends,” said Tan Yiming, an analyst at Minsheng Securities, speaking of debt issued by Kunming LGFVs.
Tan attributed the concerns to Kunming’s weakening property market, its lack of core industries to support tax revenues and negative headlines about debt issues that have hit investor confidence.
Guiyang, the capital city of Guizhou, had tried “every technical means” to resolve its debts, and “if debt repayment funds are not in place in time, debt risks may occur at any time”, the city’s finance bureau said in a 2022 work report published last week. The report was later removed from its website.
Goldman Sachs said its estimates “show that local governments’ scheduled bond repayments could reach a new high in 2023, despite efforts to constrain LGFV borrowing and reduce interest payments”. REUTERS
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