By staff reporter Wang Changyong
Part I: Banqueting on Local Finance Options
Part II: Cities Rush into Debt -- and Possible Peril
Part IV: Full Steam Ahead for New Financial Troikas
(Caijing Magazine) China's ancient capital Xi'an is a massive construction site. Two subway line projects are cutting through the city's heart, and housing developments are rising throughout the downtown area. Cranes and other equipment hum day and night. Cars, bicycles and pedestrians squeeze past muddy work sites on makeshift roads.
Behind this bustling urban scene are economy-boosting efforts of the central and local governments, which are funding growth through creative financing methods popularized by public officials in Xi'an and other communities across China in recent months.
Motivation for new construction financing is strong, overshadowing everyday inconveniences in Xi'an as well as concerns about local government investment risks, budget balancing and possible future overcapacity in manufacturing sectors now expanding with government help.
Wang Yongjie, an official with the Shaanxi Province finance bureau, told Caijing that local governments including city hall in the provincial seat Xi'an have been required by the central government to contribute altogether 5.76 billion yuan in province-wide stimulus spending for the last quarter 2008 and the first quarter this year.
Nationwide, the National Development and Reform Commission (NDRC) said the central government will provide 29.5 percent -- or 1.2 trillion yuan – toward a 4 trillion yuan stimulus package rolled out by Beijing last year to offset the global economic downturn. The remaining 2.8 trillion yuan is supposed to come from local governments, which can tap their coffers or raise funds through policy loans, hybrid municipal bonds, corporate bonds, medium-term notes and commercial bank loans.
According to Wang, the first batch of bonds issued by the Shaanxi provincial government, via the central government's Ministry of Finance, hit the market April 30. Its total value was 3.6 billion yuan. A second batch is expected to be unveiled later this year. The combined debt issue is aimed at helping Shaanxi meet its 2009 funding obligations for the stimulus package, Wang said.
"Bond issues through the finance ministry provide an enormous amount of help for local governments that need to meet co-payment targets," Wang said.
A recent National Audit Office survey found 94 percent of 335 projects nationwide backed by government stimulus funds had gotten under way by the end of March. Local governments had allocated 48 percent of their required contributions by that time.
The Shaanxi provincial government was authorized by the State Council to issue 6.3 billion yuan worth of local government bonds in 2009, Quan Yongsheng, vice director of Shaanxi's NDRC branch told Caijing, adding that 84 percent of the proceeds from the debt issue will be forwarded to city and county governments.
Shaanxi might be able to foot the bill for development projects approved by the central government. But ambitious local governments, rich and poor alike, are searching financial resources and competing to launch their own stimulus projects.
Shaanxi announced its stimulus plan early this year covering nine areas and 171 projects, with a total investment of 871 billion yuan. Investment funds worth 144.9 billion yuan are supposed to be doled out in 2009.
However, the provincial government's annual budget income is just 66.8 billion yuan. Even after adding tax revenues from the central government and other income sources, Shaanxi can count on a maximum 125 billion yuan at its disposal -- far from enough to power its development plan.
Some local governments in the province have treasury funds readily available for projects. But others are so cash-strapped that they can't even pay the salaries of civil servants, said Quan.
And even before some local governments started hunting for new income sources, one of their old money cows – fees from land sales – dried up in last year's bear market for real estate, leaving limited choices for financing.
One option, however, involves banks. As of the end of March, total loans made by Shaanxi banks had soared 33 percent compared with the first quarter last year, and new loans issued during the first three months of 2009 were double those from the same period a year before.
In addition, the provincial government has been encouraging city government-linked investment companies to issue hybrid municipal bonds. Although considered risky by some experts, these bond issues apparently received central government support.
Officials from the local NDRC have said publicly that city governments should inject, allocate and integrate assets into these investment platforms. The vehicles should be dressed up in ways that enhance their market eligibility, they said.
Moreover, the Shaanxi government currently operates four investment platforms at the provincial level. Four more are expected to be launched soon.
Where is the money going? Unlike an economic development blueprint sketched out by the central government that favors infrastructure projects and low-emissions, high-tech industry, the province's local governments have shown that they still prefer the old standbys -- manufacturing.
Shaanxi announced in February that industrial output should increase 18 percent in 2009 to help the province realize its goal of 13 percent GDP growth this year. So far, the investment strategy has kept the province on target. In the first quarter, for example, the province's economy grew 10.2 percent, which was "better than we expected, thanks to rapid investment growth," said Quan.
Shaanxi is not alone on this investment-development superhighway. The nation's manufacturing sector investment rose 27.3 percent in the first quarter. Vincent Chan, head of China Research at Credit Suisse First Boston, said manufacturing investment has been growing at a rapid pace across the country.
But this rapid expansion, fueled by investment vehicles such as bonds and encouraged by government growth targets, is not only rattling Xi'an with construction noise. It also may be increasing overcapacity risks throughout China.
"Some investments make sense locally," Chen said. "But they may look unreasonable in the national context."
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