Guizhou Province government of China has requested the lenders to put relief on debt for infrastructure investment companies that are owned by the state as a unique move that highlights the debt buried beneath the surface of the second-largest economy in the world. A meeting was assembled this month by the secretary of the Guizhou communist party and top provincial official, Shen Yiqin, along with the executives of the financial institution, regarding the extended loans for the poor, platforms for local government funding in a landlocked province.
Reported the bankers have been asked by Shen to take steps such as lowering the interest rate, postponing repayments, or refinancing to clear the risk of debts that are present on the financial platforms or companies set up by the local government for the funding of such infrastructure projects. In January, the state council of the cabinet of China encouraged Shen to take action. According to a document that was issued by the State council mentioned that in Guizhou, the financial platforms will be allowed to negotiate with the financial institutions to be able to maintain cash flow as well as extend repayments and think about debt reconstruction.
After investing in unprofitable infrastructure projects, some companies have fallen into financial difficulties.
All of this adds up to an affirmation of the delays in debts by the central government and has got the state-owned banks in a difficult spot to decline such a request from the province along with other financial groups.
According to the financial authorities of Guizhou, A group established by a China CITIC Bank branch in Guiyang, the capital of Guizhou, to handle debt talks for a company building roads and bridges with its main office in the city of Zunyi. The company which is a Zunyi-owned financing platform has revealed that the company is suffering from unpaid tax bills and several other financial problems. The local authorities were banned from issuing their bonds by the central government of China till 2014. In this case, the financing platform played the role of a loophole in the case where necessary funds were required.
After investing in unprofitable infrastructure projects, some companies have fallen into financial difficulties, which eventually have become the key source of the hidden debt problem in China. In case the banks allow the debt relief for Guizhou, the provincial government would stay away from an expensive bailout. An extension on debt restructuring and debt payments will not certainly add up as default as long as the lenders agree. Even if there is no default, the debt is no longer being repaid, and the lender suffers a loss.
Central authorities prevented the addition of hidden debt in financing platforms.
The warnings by S&P Global warn that hurdles are there for the platforms trying to raise funds, which will not lead to any improvement in the credit ratings. The motionless property market of China is shrinking the casket of the local government. According to the Finance Ministry, the amount of money made from selling land use rights dropped by 40% in June compared to the same month last year. Monthly receipts have fallen short of year-ago amounts since July of last year, and this reduction is the biggest since May of 2015.
Central authorities prevented the addition of hidden debt in financing platforms when the central government took off the prohibition against local government for issuing direct debt.
The gross domestic product of China grew only 0.4% in its second quarter, making the goal of annual economic growth of around 5.5% in danger. There are still some doubts if issuing local and national debt or front-loading the debt which is already approved would be sufficient to attain the annual GDP goal.