Recently, an announcement blew up the whole Chinese financial circle. on April 30, Hohhot Chunhua Water Development Group Co., Ltd. issued an overdue announcement, saying that due to the company’s tight liquidity, some financial institutions and other debts were not repaid as scheduled. The overdue amount of the company is 746 million, involving 11 financial institutions such as banks and leasing companies.
Chunhua Water City Investment Company issued a default announcement: 746 million overdue debts, a number of banks “step on the mines” (network pictures)
An ordinary company, issued an ordinary overdue announcement, what’s the fuss?
Wrong! Because this time is different.
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According to public information, Chunhua Water was established in 2001, is the only water business entity and important infrastructure construction investment body in Hohhot, responsible for the city’s water supply, sewage treatment, recycled water recycling and other business construction and operation management, but also involved in real estate development, tourism, dairy industry and other fields.
Here’s the key: Chunhua Water is a city-owned state-owned enterprise 100% controlled by Hohhot SASAC, which is the sole shareholder and actual controller of Chunhua Water.
Chunhua Water is not an ordinary local state-owned enterprise, but an important local infrastructure investment body. If you know a little bit about local bonds, urban investment bonds and municipal infrastructure, you will know that Chunhua Water is a local government financing platform. To be precise, it is a city investment company, and the bonds it issues are called city investment bonds.
What does a city investment company do?
Simply put, they do what local governments do: build infrastructure such as bridges and roads, carry out municipal projects such as parks and greenery, construct river training/city water supply, demolish and relocate/rehabilitate shantytowns/grade one land preparation, etc. These are the responsibilities of local governments.
These things are the responsibility of the local government, but the local government needs a body to implement and act, so the responsibility falls on the head of the city investment company. To a certain extent, the city investment company is similar to a government department, from the registration of capital, to the appointment and removal of personnel, the main business, financing and borrowing are closely linked to the government.
One particularly important point is financing, these urban investment companies from banks, trusts, financial leasing and other financial institutions borrowed a lot of money, and behind the borrowing are implicit or explicit guarantee of the local government, so urban investment debt has always been considered a local government debt.
Thus, the influence of Chunhua Water default is clear, where is the enterprise default, obviously the government default ah!
Under the pressure of public opinion, although Chunhua Water and the Hoh government have said, “multi-channel fund raising, a variety of ways to resolve maturing debts”, “to ensure that maturing debts are paid as scheduled”, but everyone’s trust in urban investment debt is on the way to collapse.
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Here it is necessary to talk about the past life of urban investment bonds.
Urban investment bonds are the product of a special historical stage, the result of a compromise between the national fiscal system, local governments and infrastructure to boost the economy and other factors, which started in 2008 …… on the year of the global financial crisis.
The U.S. subprime mortgage crisis triggered a global financial crisis, and governments cut interest rates and printed money to stimulate the economy. The special economic and political system gives China more cards to play in the face of external shocks, one of which is government investment …… to build high-speed rail, airports, highways, bridges and roads, subways and light rail, parks and municipalities, water and sewage, etc., as a way to drive investment and stimulate the economy.
For the national railroad / highway / airport and other infrastructure, the central financial investment, can belong to the head office financing bonds, and for local municipal infrastructure, how to get the money?
These projects are public works, little revenue, and even cash flow back to zero, private capital simply do not want to invest. Some people will say you can private construction, the government to buy, but where does the local government money come from …… rely on taxes? To know the vast majority of cities and counties that the point of taxation to maintain municipal operations would be good.
And that time the local government did not issue debts. On the one hand, local governments have to start projects as soon as possible, infrastructure investment to boost the economy, on the other hand, local governments have no issued debentures, can not raise funds, how to do? So, the city investment company came out of nowhere, with names such as xx city construction and development company, xx asset management company, xx investment group, xx state-owned assets operating company, etc..
They are the main body of borrowing money to finance, is the main body of investment and construction, is the main body of stimulating and pulling the economy, after which the government then pays to buy their behalf of the construction project. The government’s money comes overwhelmingly from land sales revenue (which is also known as land finance), and behind this is the roaring urbanization process and high housing prices bubble.
The high tide will always pass, the splendor will return to calm, after the big development, construction, investment, stimulation, but left a mess of debt … borrowed money always have to pay back ah, but these infrastructure does not have the ability to create cash flow, a park will have what income?
Local government debt is getting more and more leveraged, and many of them are in the form of municipal bonds, and more importantly, under the strict regulation of the property market, many local governments have no more income from land sales.
Some data show that in 2020 there are 17 provinces with a debt ratio of more than 100% of the warning line this is the source of urban investment debt and the current crisis.
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In the outline of the 14th Five-Year Plan of the Beijing authorities, it is clearly proposed to “keep the macro leverage ratio stable and steady”, as well as to resolve the hidden debts of local governments in an appropriate manner… and the hidden debts are mainly urban investment debts.
The biggest problem of urban investment debt is the lack of cash flow income from the invested projects, and the large scale, the project itself is unable to return the loan, although you can borrow new to repay the old, although you can replace high-interest borrowing with low-interest borrowing, but the ultimate principal and interest solution still depends on the local government.
Due to the long-term existence and large scale of urban investment debt, which is not included in the government debt system for management, the total amount of long-term ambiguity and confusion in the debt structure, is the main risk in local debt, and whether urban investment debt can be successfully resolved is related to the security of the local budget.
Urban investment bonds are apparently and legally state-owned enterprise debts, but in essence they are local debts. It seems to be normal default, but once the default will affect the area of other state-owned enterprises / urban investment platform of the subsequent issuance of debt financing … and this will affect the local economy, which is the reason why Chunhua Water first took the initiative to announce the default, and then government officials came out to appease public opinion.
But what comes around always comes around.
In April, China’s State Council issued the “Opinions on Further Deepening the Reform of the Budget Management System” and proposed to “clean up and standardize local financing platform companies, divest them of government functions, and implement bankruptcy restructuring or liquidation in accordance with the law for those that have lost their solvency”, which is exactly the background of Chunhua Water’s default announcement.
In the future, the transformation of urban investment companies is the direction of local state-owned enterprises, the bonds issued by them will be ordinary corporate bonds, and no longer come with the responsibility of the implicit government guarantee in the head, the bond holders will also bear their own profits and losses.
City investment companies, a product of this special historical stage, will end their historical mission as local financing platforms, but the debt mess left behind is still not properly resolved.
Over the years, the market has undergone a baptism.
The bankruptcy of Baoshang Bank broke people’s trust in the bank’s rigid exchange; the thunder of many trust companies such as Anxin/Sichuan broke people’s trust in the trust’s rigid exchange; the default of corporate bonds such as Yong Coal broke people’s trust in local state-owned enterprises; not to mention P2P finance, private lending, wild private equity and other kinds of non-standard/illegal investments.
Now it is finally the turn of urban investment bonds, trust in them is collapsing, and default seems to be on the way, what kind of butterfly effect will this trigger?
Let’s wait and see!
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