PBOC’s Zhou Says LGFV Reliance on Land Sales Is ‘Problem’

PBOC’s Zhou Says LGFV Reliance on Land Sales Is ‘Problem’

Chinese local government financing vehicles’ reliance on land sales and rising land prices to repay debt creates “problems,” People’s Bank of China Governor Zhou Xiaochuan wrote in a commentary. LGFVs are similar to municipal bonds in more mature markets, with both relying on future income to fund repayments, Zhou said in comments published on the central bank’s website yesterday. The difference is that Chinese financing platforms rely on land sales and not tax revenue for income, he wrote.“As China rapidly evolves, some local governments want to accelerate their urbanization and require a huge amount of investment,” Zhou wrote. “Yet, government finances are limited, what can they do? So they consider using future income to bridge the current funding gap instead.”

Zhou’s comments come before the results of China’s first full audit in more than two years of its local government debt, which the National Audit Office said in 2011 totaled 10.7 trillion yuan ($1.75 trillion). A lack of transparency in LGFVs prompted Fitch Ratings Ltd. to cut China’s long-term local-currency debt rating in April. China ordered the review in July.

China’s Vice Finance Minister Zhu Guangyao, said at the Group of 20 Summit in Russia last week that the Finance Ministry will release the findings of its audit in October. The total volume of debt is expected to rise slightly, he said.

In his comments yesterday, Zhou also touched on the importance of preferred stocks and convertible bonds to capital markets as China’s economy and market develops. Contingent convertible bonds are a source of emergency capital, he said.

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net; Hu Shen in Beijing at hshen33@bloomberg.net

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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