China Debt Solution Seen Aided by Selling Listed Shares: Economy
China’s swelling local-government debt is spurring speculation that authorities could sell some of their holdings of listed shares, estimated by UBS AG to total at least 5 trillion yuan ($820 billion), to make repayments.
Partial divestment of governments’ stakes in state-owned companies is one option to address the debt issue, said Yao Wei, China economist at Societe Generale SA in Hong Kong. Local governments have already made some sales over the past two years and repayment pressures mean that more are likely, said Chen Li, a Shanghai-based analyst at UBS.
Officials have the option of turning to the stakes as income from land sales falls and a forthcoming national audit, the broadest in two years, puts a spotlight on regional borrowing. Local-government funding was ranked as most in need of reforms, according to a survey of analysts by Bloomberg News ahead of a key Communist Party meeting next month to discuss economic policies.
“Local governments have various entities and agencies, from pension management bureaus to state-owned asset supervision bodies, to hold shares,” Yao said. “One thing is for sure -- the number is in the trillions,” said Yao, who estimated the stockpile at 3 trillion yuan as of 2011.
The benchmark Shanghai Composite Index (SHCOMP) fell 0.9 percent today and is down 5.6 percent this year.
China’s National Audit Office has submitted its report on local-government debt to the State Council and the level of borrowings exceeds 14 trillion yuan, Caijing reported earlier this week on its website.
Divestment of government shares is a long-term process and won’t be conducted in a “big bang” way, Yao said. “If local governments come out and announce big share-sale plans, it will send jitters through retail investors and cause stock prices to plunge,” she said.
Chen, head of China equity research at UBS Securities, said sales of equity stakes will “probably continue for a while.” Governments can sell shares on the market or can tap buyers such as private-equity companies, foreign investors or company management, Chen said.
Zoomlion Heavy Industry Science and Technology Co., China’s biggest construction-equipment maker, is an example of a company partly owned by a government. Hunan State-Owned Assets held 19.97 percent of the A-shares listed in Shenzhen as of April 2, according to data compiled by Bloomberg. The government of Hunan province owned 16.2 percent of Zoomlion at the end of 2012, according to the annual report from the Changsha, Hunan-based company.
The largest shareholder in Bank of Chongqing Co., which will begin trading next week after an initial public offering, is the government of the southwestern Chinese city of more than 30 million people, according to the bank’s prospectus.
China in July ordered a nationwide review of local-government debt, which the National Audit Office said in 2011 totaled 10.7 trillion yuan. Former Finance Minister Xiang Huaicheng said in April the amount may be more than 20 trillion yuan, underscoring the risks President Xi Jinping’s government faces as the economy slows and it tackles the effects to the financial system of a record credit boom.
Societe Generale’s Yao said other options for dealing with the debt include restructuring it using tools such as securitization and having the central government assume the debt. The audit report “will be used as the base for the debt workout plan,” she wrote in a note today.
Governor Haruhiko Kuroda’s board maintained a pledge to expand the monetary base by 60 trillion to 70 trillion yen ($711 billion) a year, matching the forecasts of all 34 economists in a Bloomberg News survey.
Taiwan’s economy grew 1.58 percent in the third quarter from a year earlier, the slowest pace in a year, increasing pressure on the central bank to extend an interest-rate pause, a report showed today.
In Europe, German retail sales unexpectedly fell in September from the previous month, and U.K. home prices rose by more than estimated in October. In North America, Canada may say the economy expanded at a slower pace in August than in July, while the U.S. gives a weekly report on jobless claims.
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