Bloomberg News

China Local-Government Borrowing Costs Drop After Trust Bailout

January 27, 2014

Borrowing costs for China’s financiers of roads, subways and sewage plants dropped after a troubled trust product was bailed out, averting a threatened default that added to concern about record local debt.

The average yield on five-year notes rated AA, the most common grade for the so-called local-government financing vehicles, dropped two basis points yesterday to 7.58 percent, the biggest decline in more than two weeks.

Industrial & Commercial Bank of China Ltd. said investors in the high-yield trust, which was issued by China Credit Trust Co. and set up to lend money to a coal miner that subsequently failed, can recoup their funds. The threat of a default in the product had fueled concern that mounting local-government debt is unsustainable. The liabilities swelled to 17.9 trillion yuan ($2.96 trillion) as of June from 10.7 trillion yuan at the end of 2010, according to data compiled by the National Audit Office.

“The bailout of the trust product has helped ease investors’ anxiety,” said Li Qing, a Shanghai-based bond analyst at Guotai Junan Securities Co., the nation’s second-biggest brokerage. “The news is good for all high-yield bonds, including LGFVs. The positive sentiment may last until the next repayment problem arises.”

Since 2012, more than 20 trust products totaling 23.8 billion yuan have run into payment issues, according to Wang Tao, a Hong Kong-based economist at UBS AG. About half of these cases are still in legal process, the bank said in a report this week. Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September, according to the China Trustee Association.

Government Backing

Rights in the 3 billion-yuan product issued by China Credit Trust can be sold to unidentified buyers at a price equal to the value of the principal invested, according to one investor who cited an offer presented by ICBC and asked to be identified only by his surname Chen.

Premier Li Keqiang is trying to trim unprecedented borrowings in the world’s second-biggest economy, whose growth slowed in the fourth quarter to 7.7 percent from 7.8 percent in the previous three months, without sparking a financial panic. Local financing units must repay a record 299.5 billion yuan of bonds this year, according to Everbright Securities Co., the most since it started compiling the data in 2000 and up 56 percent from 2013.

The rate on 2015 yuan bonds of Wuhan Urban Construction Investment & Development Corp., a local-government financing vehicle in the capital of the central Hubei province, fell three basis points yesterday to 7.37 percent, the lowest since Nov. 18. The yield on 2020 notes sold by Lishui City Construction Investment Co., a funding unit based in the eastern province of Zhejiang, declined one basis point yesterday to 7.38 percent, the biggest drop since Nov. 29.

“If a private company’s insolvency is aided by government-backed entities, I can’t imagine the government will allow any of its guaranteed companies to default,” Yang Feng, a Beijing-based analyst at Citic Securities Co., said yesterday.

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net


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