July 9 (Bloomberg) -- A Chinese city known for its empty skyscrapers is struggling to repay debt and has resorted to borrowing from companies to pay workers, a magazine published by the official Xinhua News Agency reported.
Some district governments of Ordos, Inner Mongolia, had to borrow money from companies to pay salaries of municipal employees, Economy & Nation Weekly said in a July 5 report on its website. Ordos local-government entities have amassed 240 billion yuan ($39 billion) of debt, while the city had 37.5 billion yuan of revenue last year, the publication said without specifying annual interest costs.
The report adds to signs of strains in an economy that probably decelerated for a second straight quarter as overseas and domestic demand slowed and Premier Li Keqiang reined in credit growth. China Rongsheng Heavy Industries Group Holdings Ltd., the country’s biggest shipyard outside state control, said last week it’s seeking financial support from the government after orders plunged.
“Isolated default cases will happen in places like Ordos - - people know investment in these places is unsustainable,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong.
Two phone calls to Ordos’s government general affairs office went unanswered. The city is also known as Erdos.
Vice Finance Minister Zhu Guangyao said last week that China should be on “high alert” to risks in local government debt. Coal-rich Ordos is known for a building frenzy in recent years, including a new area named Kangbashi that was designed to accommodate 300,000 people.
Ordos had gross domestic product of 365.7 billion yuan in 2012 and 2 million residents, according to the local government, giving it a per-capita GDP close to Hong Kong’s. The magazine cited an unidentified person close to the city government for the debt number.
The government’s debts include delayed payments to builders as well as loans from companies, the magazine said.
Ordos’s Dongsheng district has the most debt with at least 120 billion yuan, followed by Yijinhuoluo district with about 70 billion yuan, according to the article. The expansion of government payrolls is another reason for Yijinhuoluo’s debt, the magazine reported, citing an unidentified local government employee.
Officials with section-chief rank or higher can take a form of retirement at age 50, where they retain salaries and benefits without having to work, the person said, according to the publication.
Ding and his Citigroup colleagues yesterday lowered their estimates of China’s growth to 7.4 percent from 7.6 percent in 2013 and to 7.1 percent in 2014 from 7.3 percent. Fixed-asset investment growth will lose steam as credit for local government financing vehicles dries up, Ding said. That slowdown in investment is the “major underlying factor for us to cut China growth forecasts,” he said.
Last month, Shang Fulin, chairman of the banking regulator, said most local debt is guaranteed with assets and the “overall risk is controllable.”
The central government may be forced to bail out some local authorities and take over their liabilities, Moody’s Investors Service said last month, after a new audit report showed a jump in borrowings. The ratings company lowered its outlook for China’s sovereign credit rating to stable from positive in April and Fitch Ratings Ltd. cut the country’s long-term local-currency debt rating, with both citing risks from local-government debt and credit expansion.
China’s GDP may have expanded 7.5 percent in the April-June period from a year earlier, according to the median estimate of 31 analysts surveyed by Bloomberg ahead of a July 15 release by the statistics bureau. That would be down from 7.7 percent in the first quarter and 7.9 percent in the October-December period.
Rongsheng also said it’s “restructuring” its workforce and is in talks with financial institutions about renewing credit facilities.
The order book at Chinese shipbuilders fell 23 percent at the end of May from a year earlier, according to the China Association of National Shipbuilding Industry. One-third of the nation’s yards face the danger of closing within five years, having failed to get orders “for a very long period of time,” Wang Jinlian, the group’s secretary general, said July 4.
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