If the Chinese government is able to reach its 5.5 percent economic growth target this year, it will be due in part to retail investors like Jane Song.
In May, Song invested Rmb 200,000 ($ 29,600) in a fixed-income asset management product issued by a local government funding vehicle in eastern Shandong Province. A financial advisor in Shanghai, she was not baffled by the growing reluctance of larger investors to support LGFVs, which play a vital role in financing infrastructure development in China.
“If the WMP fails, the local government will have trouble accessing credit in the future,” said Song, who hopes to get 8.8% interest on the “medium risk” product. “They won’t let that happen.”
The magnitude of the challenge facing China in achieving its annual growth target was underlined on Friday with data showing that the economy expanded by only 0.4% year-on-year in the three months to June.
Achieving 5.5 percent growth for the year will only be possible if LGFVs accelerate construction activity. But local government vehicles are struggling to borrow from banks and investors in institutional bonds, and are increasingly being forced to offer retail investors high interest rates to raise cash.
Taking direct advantage of retail investors, some for just 50,000 Rmb each, is a new way out for LGFVs. Traditionally, they have raised capital from institutions, mainly banks, or from wealthy individual investors acting through third parties, such as trust companies and brokers, and with a minimum investment of 1 million Rmb.
But Beijing’s crackdown on shadow banking in recent years has made it more difficult to access this individual investment. The exceptional value of trusted products backed by infrastructure has been reduced by almost half compared to the 2017 high of Rmb 3.2 trillion.
Last month, Limin Construction Development Group, an LGFV in Zouchheng City in Shandong, turned to social media platforms such as WeChat in its effort to raise Rmb 200 million from retail investors.
It promises 8.6% interest, much more than it would pay if banks were willing to lend. The average annual interest rate charged by Chinese banks on business loans was 4.16 percent in June.
Limin’s prospectus does not specify how the revenue will be spent, other than saying it will help “replenish working capital”.
“You don’t need to know exactly how we’re going to spend the money,” a Limin executive said. “We’ll pay you back on time and that’s all that matters.”
The executive, who asked not to be identified because he was not authorized to speak to foreign media, added that the vehicle was about to achieve its fundraising goal.
Hundreds of LGFVs across the country have issued similar appeals on social media, raising concerns that already heavily exploited local governments are accumulating potentially explosive debt burdens.
“It simply came to our notice then [local governments] to slow down the inevitable, “said Andrew Collier, CEO of Orient Capital Research in Hong Kong.” This is the last sigh of a desperate economy trying to paper over its growth. “
Samuel Kwok, head of public finance for Asia and the Pacific at Fitch Ratings, said the issuance of short-term, high-cost debt by many LGFVs to China’s economically weaker regions was a sign that they had refinancing problems.
“The ability to refinance is key for LGFVs, as they are supposed to fund local economic development on behalf of governments,” Kwok said.
Investors in bonds and other more traditional creditors have become more cautious with LGFVs, although Beijing makes it a political priority to support infrastructure projects and boost an economy hard hit by the “zero-Covid” blockades. president Xi Jinping.
LGFVs with AA or lower credit ratings only raised 204 billion Rmb net of the bond market during the first half of this year, 50% less than in the same period in 2021, according to East Money Information, a provider of financial data.
Several local banks, which are the largest bond buyers in China, told the Financial Times that they avoided low-rated LGFV bonds. “We will not opt for LGFV bonds with a rating below AA +,” said an investment manager from a lender in the eastern city of Suzhou. “And there is a clear preference for bonds issued by economically strong regions.”
Limin, the Zouchheng-based LGFV, reported Rmb 2.9 billion in cash at the end of last year, almost 80% of which it was unable to access because it pledged as a margin deposit for bank creditors.
“If you have 2.9 billion Rmb in cash and you rush to pay 9% for 200 million Rmb in private loans, it’s about pretending you’re solvent when you’re not,” Collier told Orient Capital.
Limin said it was “running normally.”
Yang Xiaoyi, a government finance analyst at Beijing-based consulting firm Mingshu Data Technology, said it was increasingly common for LGFVs to delay principal repayments owed to investors while offsetting annual interest due, essentially turning their investments into bonds. perpetual.
“You have to allow the investment to continue indefinitely to avoid default,” Yang said.
Regional authorities are aware of the risks. In an internal circular issued last month by the Henan Province Financial Office and seen by the FT, the regulator said it would ban local LGFVs from selling debt securities directly to people. The ban came after hundreds of investors invested in multiple platforms offering annual returns of 8.5 to 10%.
“The practice,” the office said, “has severely disrupted the economic and financial order and could easily lead to social instability.”