Bloomberg News

28% of China Local Debt Vehicles Are Losing Money, Study Shows

September 28, 2011

Bloomberg News

Sept. 28 (Bloomberg) -- Nearly a third of China’s local government financing vehicles are losing money, according to a study published in the magazine of the country’s official bond clearing house.

A total of 28 percent of these entities have negative cash flow from operations, according to a study by Beijing-based analysts Zhang Xu at Guosen Securities Co. and Qiao Wei of China Asset Management Co. That compares with 14 percent for ordinary companies, they said.

Local governments in China, barred from directly selling bonds or taking bank loans, set up at least 6,576 companies to raise money for roads, sewage plants and subways. A June report by the national auditor said local governments had 10.7 trillion yuan ($1.67 trillion) of debt and warned of repayment risks. It said some authorities had offered illegal guarantees for these companies.

About 22 percent of the local government entities had debt- to-asset ratio above 70 percent, meaning their ability “to get new loans isn’t great,” Zhang and Qiao said.

The return on equity for these companies is 4.43, compared with 7.99 for ordinary companies, the study said. “Under the current situation, many local financing vehicles have no way to realize real earnings,” the analysts wrote.

Still, China’s central and local government debt is controllable, the study said, at 56 percent of gross domestic product compared to an average of 65 percent among Group of 20 countries. One solution is to use money from central government bond sales to pay back local government debt, it said.

--Henry Sanderson. Editors: John Brinsley, Neil Western

To contact Bloomberg News staff for this story: Henry Sanderson in Beijing at

To contact the editor responsible for this story: Shelley Smith at

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