ZT: Sichuan Borrows as California Combats Muni Crisis

maomi

Sichuan Borrows as California Combats Muni Crisis
By Bloomberg News - Nov 15, 2010 2:59 PM ET Tweet  (6)LinkedIn Share
Business Exchange Buzz up! Digg Print Email While California pays the price for its fiscal emergency on the other side of the Pacific, companies linked to China’s local governments may match their record for bond sales even after regulators added curbs to reduce risk.

Sichuan Development Holding Co., an arm of the Chinese province, sold 8 billion yuan ($1.2 billion) of notes on Nov. 8, adding to offerings by the cities of Maanshan and Shangrao, according to data compiled by Bloomberg. Southwest Securities Co. in Beijing forecasts municipal borrowers will raise 250 billion yuan from bonds this year, equaling their all-time high in 2009.

“China hasn’t yet had a precedent of a local government bankruptcy” in the yuan market, Wang Jianhui, an analyst at Southwest Securities, said in a telephone interview. “It’s not like America,” he said.

Cities and provinces in China turned to bonds after a 9.59 trillion yuan borrowing binge in 2009 forced the government to impose a cap on bank lending. Sales have been sustained even though regulators barred local governments from securing debt with tax revenues. In the U.S., the recession left states facing a $130 billion budget gap for fiscal 2012, according to the Center on Budget and Policy Priorities, spurring investor Warren Buffett to warn about the risk of widespread muni bond defaults.

Infrastructure Finance

Officials have set up about 8,800 companies to fund infrastructure projects in China, according to estimates from Credit Suisse Group AG, because the law prevents cities and provinces from direct bond sales to investors. At 250 billion yuan, their combined issuance this year would still be less than the $50 billion borrowed by California and the state’s local municipalities, Bloomberg data show.

Local governments’ outstanding debt rose to a record 11.4 trillion yuan last year, according to Victor Shih, a professor at Northwestern University who warned about growing municipal indebtedness in March.

“Creditors aren’t afraid because they know a default would look really bad for the central government,” Shih said in an interview in Beijing. “Investors figure the central government will always work something out” using state banks, so “you have this too-big-to-fail logic really taking hold,” he said.

The yield on Chongqing City Construction Investment Co.’s 3 billion yuan of 5.3 percent bonds due October 2013 dropped to 4.86 percent from 5.07 percent this year, according to Chinabond prices on Bloomberg.

Payment History

While companies linked to local governments have never failed to make payments on their yuan-denominated bonds, Guangdong International Trust & Investment Corp. defaulted on so-called Yankee notes in 1998, becoming the first Chinese issuer to do so since the People’s Republic of China was formed in 1949.

A domestic default may “affect social stability,” Ivan Chung, a senior analyst at Moody’s Investors Service, said in an interview in Beijing. Local governments would probably make “arrangements” to prevent one, he said.

Moody’s raised China’s bond rating to Aa3, its fourth- highest level, on Nov. 11. The country’s efforts to tackle asset bubbles and avert bad loans have meant the “likely containment and effective management” of losses from record lending last year to counter the financial crisis, the credit assessment firm said in a statement.

Government Bonds

The yield on the 3.28 percent government bond due August 2020 was unchanged yesterday at 3.73 percent, Interbank Funding Center data show. China raised its benchmark one-year lending rate on Oct. 19 by a quarter of a percentage point to 5.56 percent as inflation accelerated to its fastest pace in two years last month.

The yield on India’s 10-year bonds fell 2 basis points to 8.07 percent yesterday. Similar-maturity bonds pay 12.6 percent in Brazil. These three nations, plus Russia, form the so-called BRIC group of countries.

Elsewhere in China’s credit markets, five-year credit- default swap contracts on government bonds rose 7 basis points to 60.8 basis points last week, CMA prices in New York show. The contracts fell about 15 percent in October following a drop of 19 percent in September.

Credit-default swaps typically decline as investor confidence improves and rise as it deteriorates. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements. Government debt investors usually buy the contracts to hedge against a rise in yields.

Rate Swaps

One-year interest-rate swaps, or the fixed cost needed to receive the floating seven-day repurchase rate, gained five basis points to 2.67 percent yesterday. Five-year swaps rose two basis points to 3.83 percent. That rate is up from this year’s low of 2.68 percent on Aug. 12, according to data compiled by Bloomberg.

The yuan has appreciated 2.7 percent versus the dollar since a two-year peg was relaxed in June, and non-deliverable forwards show traders are betting on a 2.4 percent advance in the coming 12 months. The currency weakened 0.1 percent to 6.6455 per dollar yesterday in Shanghai, according to the China Foreign Exchange Trade System, after China deflected U.S. criticism of its currency policy at a meeting of leaders at the Group of 20 nations over the weekend.

China’s National Development and Reform Commission stopped approving local government-linked bond sales for more than a month after the State Council ordered a clean-up of their finances Jun. 10.

Collateral Curbs

Regulators then stopped them from using assets that depend on local government revenues as collateral, according to China Merchants Securities Co. Bonds have since been sold with guarantees from banks and state-owned enterprises.

While concern about local government debt may be “rational,” the new rules will prevent risks from becoming “concentrated,” Xu Lin, a director in the NDRC’s finance department, said at a conference last month.

Anhui-based Maanshan Construction Investment Development Co. sold 2 billion yuan of 4.86 percent seven-year bonds in July that are guaranteed by the state-owned parent of Maanshan Iron & Steel Co. The notes are rated AA+ by Dagong Global Credit Rating Co., its second-highest grade and three levels above Dagong’s rating for the U.S. government. The bonds yielded 5.3 percent on Nov. 15, according to Chinabond prices.

California Sales

That compares with San Francisco City & County Public Utilities Commission, which sold taxable 4.1 percent bonds in June, Bloomberg data show. The notes, due in November 2017 and rated Aa2 by Moody’s, traded at an average yield of 4.13 percent on June 10, according to Municipal Securities Rulemaking Board data.

California is selling $10 billion of one-year notes this week to boost cash on hand, as the state that produces 13 percent of the U.S. gross domestic product tries to assure investors it can repay the loan amid a $25 billion budget gap.

Investors are being offered $2 billion of notes maturing in May at tentative yields of 1 percent to 1.25 percent, according to two people familiar with the offering. That’s about 0.58 to 0.83 percentage point more than top-rated one-year municipal bonds as of Nov. 12, according to Municipal Market Advisors data. The $8 billion of securities maturing in June are quoted at 1.25 percent to 1.5 percent, or about 0.83 to 1.08 percentage points more than top-rated notes.

Fiscal Emergency

California Governor Arnold Schwarzenegger, citing a $25.4 billion budget gap over the next 19 months, declared a fiscal emergency this month and called lawmakers to a special session in December to begin dealing with the problem. He wants to take steps to erase an officially estimated $6.1 billion gap that has already emerged in the budget enacted last month.

Notes sold by companies linked to local governments are listed on China’s interbank and exchange bond markets. Qualified Foreign Institutional Investors, or QFIIs, may buy and trade the notes on the exchange market.

Warren Buffett, whose Berkshire Hathaway Inc. sells auto policies and catastrophe coverage, told the Financial Crisis Inquiry Commission in June that U.S. municipal bonds face a “terrible problem.” The U.S. government may be compelled to rescue at least one state from default, he told shareholders at Omaha, Nebraska-based Berkshire’s annual meeting May 1.

Forty-six U.S. issuers have defaulted on about $1.7 billion of muni bonds this year, the Distressed Debt Securities Newsletter said in August. About $1 billion of the securities fail in a typical year, it said.

--Henry Sanderson. With assistance from James Regan in Hong Kong, Judy Chen in Shanghai, Mark Tannenbaum and Brendan A. McGrail in New York, and Michael Marois in Sacramento. Editors: Hugh Chow, Will McSheehy

To contact Bloomberg News staff on this story: Henry Sanderson in Beijing at 86-10-6649-7548 or hsanderson@bloomberg.net

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net

maomi

Looks like local goverment in China is no better than California financially.

lastbatch

Looks like local goverment in China is no better than California financially.
maomi 发表于 2010-11-15 21:49

this article shows complete ignorance

waste of my time

Poo

this article shows complete ignorance

waste of my time
lastbatch 发表于 2010-11-15 22:29

some article are suite to your needs some are not. If you do not like the article please just skip over.
At the same time, at least please be respect to some one have taken the effort to post the article.

thank you!

revolver

It's no secret that China's local government investment vehicle are having serious problems.