Debt restructuring, equity swap can release burden: experts
The level of credit risks for State-owned enterprises (SOEs) backed by local governments in China is rising, Moody's said on Thursday, but the central government is unlikely to offer full support as it takes a more market-oriented approach in resolving debt restructuring.
Local government SOE liabilities are now surpassing 35 trillion yuan ($5.3 trillion) nationwide, and for most local and regional governments, these liabilities are more than their annual fiscal revenue, according to a report released by Moody's Investors Service on Thursday.
The amount of SOE liabilities and quality of SOE assets vary across regions, Nicholas Zhu, vice president of Moody's Investors Service, said at a press briefing in Beijing on Thursday.
For example, North China's Tianjin Municipality, Southwest China's Chongqing Municipality and North China's Shanxi Province were the three regions with the highest recorded SOE liabilities.
Total SOE debts in Tianjin were 600 percent of the annual revenue of the municipal government in 2014, and liabilities in Chongqing and in Shanxi were 500 percent and 400 percent of local revenue, respectively, he noted, citing the latest data available from the Ministry of Finance.
Over the past decade, GDP growth in Tianjin and Chongqing has been largely driven by investment in infrastructure, transportation and energy, which was equaled by a rapid debt-financed expansion, Feng Liguo, an expert at the Beijing-based China Enterprise Confederation, told the Global Times on Thursday.
For instance, the investment in infrastructure projects such as local port expansion, construction of a logistics center near the local airport and new subway lines in Tianjin amounted to 263.4 billion yuan in 2015, a 20 percent year-on-year increase, according to the local bureau of statistics.
Along with SOEs in Shanxi Province, those in Northeast China's Heilongjiang Province, North China's Inner Mongolia Autonomous Region and in Southwest China's Yunnan Province, have the worst financial performance, Zhu said during the briefing. For example, the return on net assets of SOEs in Heilongjiang was close to minus 1 percent from 2012 to 2014, he noted.
Greater default risks
Moody's Investors Service sees the greatest risk for SOEs operating in commercial sectors, especially industries dealing with overcapacity including the coal and steel industry, as opposed to companies which provide public goods or services such as dominant infrastructure companies and metro operators.
The total outstanding defaults in the onshore market, including SOEs, hit a peak recently, when they reached 25.4 billion yuan as of August 12, a two-fold increase in the past two years, Guangzhou-based news website infzm.com reported on Wednesday. Over 50 percent of the 41 defaulted bonds were issued by SOEs, infzm.com noted. Those defaults add up to an estimated 16.47 billion yuan.
In April, Chinacoal Group Shanxi Huayu Energy Co failed to pay 637.7 million yuan in principal and interest on domestic short-term commercial debt maturing on April 6. This was the first domestic bond default by an SOE-controlled company in the coal industry since 2012, according to Reuters.
"Local governments are becoming cautious about offering financial support, unless the SOE default could trigger a regional or systemic financial crisis," Ivan Chung, associate managing director at Moody's Investors Service, said during the briefing.
Government support weakened
"It is very important to recognize that not all SOEs are equal in their likelihood of receiving support," Chung said, noting that this differentiation in credit risk is going to continue as the nation evolves to address the growing risks to the central, regional and local governments from SOE liabilities.
SOEs that handle public goods services and key infrastructure, including regional utilities, ports and expressways, would be the first to receive government support, while those engaging in commercial activities such as property development and commodity trading are less likely to be backed by the government, Moody's predicted.
"It is impossible for the local governments to support them all, particularly those on the brink of bankruptcy," Feng said.
In addition to debt restructuring, debt-to-equity swap could be a feasible approach for struggling SOEs, which has to be market-based, Song Qinghui, an independent economist, told the Global Times on Thursday.
The nation has been exploring debt-for-equity swap in recent months to deal with high corporate leverage as well as nonperforming loans in the banking sectors, according to media reports.
The program will allow China's commercial banks to swap the debt they hold in underperforming companies for stock holdings, according to the Financial Times.
