Chinese local governments are padding their balance sheets with billions in fake assets

Chinese local governments are padding their balance sheets with billions in fake assets

By Gwynn Guilford @sinoceros 10 hours ago

Even China’s most prominent cities and provinces are increasingly relying on high-risk and murky forms of borrowing. That’s according to a new report from China’s National Audit Office on the finances of 36 provincial and municipal governments(link in Chinese). The report covered the governments of cities including Shanghai, Chongqing and Tianjin, and the provincial governments of Guangdong, Jiangsu and others. Here’s a roundup of the most notable numbers:

Local government debt hasn’t gone up much recently… or so it might seem. At the end of 2012, those 36 local governments had racked up $628 billion in debt, a 12.9% increase on what they’d amassed by the end of 2010. That’s not exactly shocking. But there are hints that the debt of some local governments may be threatening to spiral out of control: 12 of them saw their debts rise 20% or more. Plus, as China Real Time estimates, the report probably only covers 25-30% of total local government debt.

A sizable part of some local governments’ debt is dubious “shadow lending.” Nearly 16% of the total debt accrued by 13 local governments since 2010—$36 billion—came from trust loans and other sketchy financing, which channels lending off bank balance sheets. That could be higher—the report said financing through these channels is easy to conceal. It also noted that these are especially risky since rates tend to be much higher than those of banks—up to 17.5% annually. Nearly half of the local government debt came from local government financing vehicles (LGFVs). That’s worrisome because the report confirmed that the little-regulated LGFVs are much more problematic than headline debt. The LGFVs are investment proxies which local governments can use to take out loans, since they’re not allowed to issue bonds. But the LGFVs often use government-owned assets as collateral for the loans, even though they don’t actually own the assets. Their government affiliation also allows them to borrow at rates that ignore underlying risk, and to roll over existing debt. These old tricks aren’t working like they used to, though: the report found that 151 of these LGFVs lacked the income to cover 2012 debts owed, and another 37 actually reported losses.

Chasing old debt with new. As many have worried, a lot of new debt is going toward old loans instead of into the real economy. In 2012, of the debt payments for the 223 LGFVs surveyed, about $12 billion, or 20%, came from new loans.

Lots of fake assets in those LGFVs.  The report surveyed 223 financing platforms associated with the 36 surveyed governments. Here are some of the antics it uncovered:

Ninety-four LGFVs listed assets that “shouldn’t exist,” amounting to $146 billion—38% of total assets.

Five were missing some $9 billion in registered capital.

Six inflated their balance sheets with $6 billion in assets.

Three provincial-capital municipal governments illegally injected some $750 million in public parks, roads and other assets into their LGFVs’ balance sheets.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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