China Development Bank Leads Debt Fix in Another City

(Bloomberg) -- China Development Bank is leading an effort to fix local debt woes at Xiangtan city in a sign that the policy lender is deepening its involvement in defusing "hidden debt" risks at municipalities.

• The lender is working on a plan to spearhead a debt resolution for Xiangtan, a city considered as a pilot unit for such an experiment in Hunan Province, according to people familiar with the matter.
• The current plan, which may change, includes proposals to swap the city’s implicit short-term debts with loans of 15 to 20 years, said two of the people who are not authorized to speak publicly and asked not to be identified.
• Syndicated loans are also being considered as part of the debt resolution plan, and that Bank of Changsha Co. and China Construction Bank Corp. may participate. Read more here.

Key Insights:

• The move follows Jiangsu, which is considering making Zhenjiang a test city for the province to provide low-cost funding from the likes of China Development Bank, people familiar with the matter said last month.
• Analysts expect more cities will follow up with their own measures to ease risks associated with hidden local government debt that’s estimated at around 35-40 trillion yuan ($5.2 trillion-$6 trillion).
• Efforts to address the issue are gaining urgency as policy makers have vowed to cut taxes by two trillion yuan this year, which is expected to reduce revenues at these local government units
• Access to funding is being eased for the nation’s debt-ridden local government financing vehicles as they face a record amount of maturities this year. The Shanghai Stock Exchange will now allow the funding units that generate more than half of their revenue from local governments to sell bonds on its platform if the proceeds are used for refinancing.

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• The slew of policies to support LGFV funding has prompted investors to rush into their debt, pushing down yields on such notes. Riskier notes with higher returns from the sector are much sought after in China as yields on yuan bonds have retreated overall amid a flurry of easing measures.

To contact Bloomberg News staff for this story: Xize Kang in Beijing at xkang7@bloomberg.net;Heng Xie in Beijing at hxie34@bloomberg.net;Jing Zhao in Beijing at jzhao231@bloomberg.net;Carrie Hong in Hong Kong at chong61@bloomberg.net

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Lianting Tu, Chan Tien Hin

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With assistance from Bloomberg