By Xu Pengcheng, DRC

2016-12-29

For a long time, local government investment and financing platform companies have played an important role in China’s economic growth whereas their development is accompanied with potential risks. As a result, it is a major and imminent task to make transformation of these platform companies.

First, current performance. To resist financial crisis in 2008 and boost local economy, local governments in China are encouraged to establish platform companies to attract banking credit, issue corporate bonds and medium-term notes and broaden financing channels by financial appropriations, land-use right transfer and equity investment. According to the motions made at the National People’s Congress and the report by the Ministry of Finance, the debt balance of local governments across the country reached respectively 16 trillion yuan in 2014 and 17.18 trillion yuan in 2016.

Second, main existing problems. 1. Inappropriate functions have left these companies vulnerable in independent management if the government does not provide support. They lack clear debt liability and are overloaded in operation. 2. Internal management is not standardized, including the composition of personnel, sources of funds and governance structure. 3. Inability in debt payment due to land revenue decline and a long cycle of fund return. 4. Improper regulations for company performance. 5. Imperfect legal systems. 6. Great difficulties in local debt-to-equity swap.

Third, existing risks. 1. Single source of funds and dependence on land revenue will trigger financial risks for platform companies. 2. The non-standardized credit rating and loan audit will lead to bank credit risks. 3. Local governments would bear financial risks as debtors and guarantors. 4. Economic fluctuations often exert a leverage effect in debts. Meanwhile, as important assets are often associated with land mortgage, local governments would have to push up housing prices, thus resulting in economic structural malformations.

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