Tuesday, December 20, 2016

In China, Trump-Style Infrastructure Partnerships Are Used to Hide Debt

The title is the title of this Wall Street Journal article dated Dec. 6. The link may allow the reader to see only a little of the article online, but some excerpts follow.

"The 400-foot JinQing Harbor Bridge under construction in this small seaside city [Wenling, China] is being financed not by bank loans or bonds but by a Chinese twist on the public-private partnerships that the president-elect has proposed to fund infrastructure projects in the U.S.

The city, like many in China, faces budget constraints after years of expansion amid warnings from central authorities that debt is already too high. So to pay for the $1.2 billion highway project that includes the new bridge, Wenling’s government teamed up with Bank of China Ltd. to create an “industrial fund” that pulls in money from ordinary investors.

Ultimately, the city is on the hook to pay back the money with a preset return. Critics of the structure say it is merely a way of disguising debt to pile more obligations on already straining government entities."
..............

“We’re seeing continued proliferation of off-balance-sheet channels to help banks extend and mask credit,” said Jack Yuan, a Shanghai-based analyst at Fitch Ratings. “Much of this is going to infrastructure and other local government projects, sometimes in the guise of funding for public-private partnerships.”

End excerpts.

This doesn't exactly parallel what I wrote in Pied Piper Finance? on Dec. 1, but it is very close. I note two minor differences. The Bank of China is government-owned, whereas the banks in my scenario are privately owned. The source of money is "industrial funds" rather than loans. A major likeness is that a big part of the money is not recognized as official government debt. In other words, it's "off-balance-sheet" like the WSJ article says.

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