The Standing Committee of the People's Republic of China on February 26 once again put forward specific work directions on the issue of localized debt, saying that "it is necessary to adhere to reform and innovation, strengthen supporting policy support, persistently advance the tackling of tough problems, and further promote the implementation of the package of debt solutions".
However, at the same time, we can also see a number of issues and controversies about the current process of debt conversion in the near future. This is a reflection of the core problems and contradictions in the process of debt conversion at the local level
The available financial resources to make ends meet
After many years of rapid growth in the total size of local debt, the actual debt ratio in many places far exceeds the capacity of local finances. If calculated according to the level of interest-bearing debt of urban investment, the local debt ratio of some areas with high debt may reach the level of 300%, far exceeding the narrow local debt ratio calculated in terms of local debt. Of course, this problem is caused by the ambiguity of the nature of the debt caused by the substitution of local urban investment as a financing platform by local urban investment as a financing platform and the borrowing of debts by corporate entities, but it can also show that the pressure on local debt is very huge.
After the issuance of Circular No. 15 of the China Banking and Insurance Regulatory Commission in 2021, the attitude towards local debt risks has been very clear, that is, "strictly limit the growth of aggregate volume and continue to optimize the debt structure". However, in the context of relatively loose and sustainable market financing, many local urban investment companies still maintain the repayment of principal and interest on existing debts through rolling borrowing, and maintain the credit of urban investment entities by borrowing new ones to repay old ones and continue financing, but this does not change the fact that the scale of debt in many regions has far exceeded the local capacity.
Therefore, when the local available financial resources continue to shrink and the countercyclical pressure increases, the depletion of local available financial resources and the state of continuing to make ends meet will be revealed to the world, and the local government will officially begin to strictly control all kinds of expenditures and actively adjust the debt structure. Against this backdrop, local payment pressures persist despite the continued stability of existing debt swap instruments and open market urban investment bonds. In other words, before the economic cycle recovers and the available financial resources of local governments recover, it is difficult to solve the core problem of localized debt, and the main strategy of the package of debt measures is still "time for space", and the real problem still needs to be solved in the course of development.
The grey area of off-balance sheet financing
In the process of tightening the belt of local governments and continuing to live a tight life, how to "live within their means" has become a key issue for local governments. In the past in the process of urban investment and local financing, there were indeed many financing tools and financing measures that had gray areas. For example, in some areas, when financing is relatively difficult, financing is carried out through financing intermediaries or financial leverage instruments, in addition to the agreed interest, urban investment also needs to pay high handling fees, consulting fees or other fees.
Or in the process of contracting ** and urban investment projects, some enterprises include project financing or additional financing business in addition to engineering construction. However, because the regulators have long prohibited this increase in local hidden debts, such financing businesses are often agreed on in other forms of contract terms, resulting in the real face of such businesses being very complicated.
As a result, when the local government is facing huge pressure on available financial resources and very strict supervision and inspection, these gray area businesses bear the brunt, which has become a "hot potato" that they are unwilling to deal with, and there are cost disputes due to the irregularities in their implementation. In the process of continuing to promote the implementation of the follow-up package of debt policies, some compliant stock debts are expected to be further resolved and replaced, but the business in the gray area will continue to be exposed to the sun, and the business model of arbitrage through local credit has completely become a thing of the past.
Long-term development and short-term pains
After the continuous implementation of the package of debt measures, it is obvious that the boundary between urban investment debt and local debt has gradually begun to become clear, although the special nature of urban investment and its role in the operation of the local economy will continue for a period of time, but the corporate debt nature of urban investment bonds is no longer disputed.
In the current deployment of economic development, promoting a new round of technological upgrading and equipment transformation has become the most important, and a series of follow-up work such as promoting technology transformation and technological innovation at the local level can still be seen as a representative of local enterprises. However, the difficult thing is that local governments and urban investment still continue to face the dilemma of lack of available financial resources, and it is difficult to really free up their hands to promote a new round of development.
From this point of view, the follow-up package of debt policies will also have corresponding measures to solve this problem, and it is foreseeable that some directional tools will be used to solve the reasonable capital needs of new projects, and promote market-oriented debt swaps to optimize the local debt structure and ease the repayment pressure.
It can be said that further solving the local debt risk is the starting point of a new round of development, and it is very important to let the source have living water.