Beijing’s efforts to curb “covert” increases in local government debt will put a squeeze on the issuance of bonds to fund public-private partnerships.
The National Development and Reform Commission and the Ministry of Commerce recently issued the “Notice on Further Strengthening the Ability of Corporate Bonds to Service the Real Economy, and Strict Prevention of Local Government Debt Risk” (关于进一步增强企业债券服务实体经济能力严格防范地方债务风险的通知), which seeks to further standardise corporate bond financing as well as bond financing by PPP.
The Notice “strictly forbids the adoption of the PPP model to illicitly, illegally or covertly raise debt,” focusing in particular on the applicable scope of the PPP model and prudential assessments of government-paid PPP and viability gap funding PPP project debt risk.
One leading government analyst expects the notice to have a heavy impact upon PPP financing in China.
“Following the government’s strengthening of financial regulation, and significant tightening of PPP financing via bank channels, PPP bond financing will also see corresponding tightening,” said Zhang Yiqun (张依群), head researcher at the Jilin Province Department of Finance Scientific Research Academy (吉林省财政科学研究所) to Securities Daily.
According to Zhang, the prudential assessment of government-paid PPP and viability gap funding PPP will essentially bring an end to bond financing for such projects.
Zhang further points out that these forms of PPP bond financing are clear-cut examples of “equity in appearance, debt in substance” financing that serve to covertly increase the debt burden of local government.
“Given that at present the issue of local government debt hasn’t been comprehensively resolved or dissipated, recklessly allowing government paid PPP to expand will inevitably increase the operating risk of local government finances,” said Zhang.
“It would also be extremely easy to transmit [this risk] to the financial system via debt and financing chains, ruining financial stability and triggering systemic financial risk.”
Zhang said that PPP should abide by the principle that the market economy play a decisive role; engage in market-oriented operation, and resolve capital operation problems by providing high-quality services and public-payment mechanisms.
The researcher also advocates further asset securitisation of PPP, in order to “invigorate” asset stocks and increase capital liquidity, as well as raise the appeal of PPP and the operating capability of projects themselves.