In China, Trump-Style Infrastructure Partnerships Are Used to Hide Debt
06 December 2016 - 11:29PM
Dow Jones News
By James T. Areddy
WENLING, China--Campaigning on plans to rebuild American
infrastructure, Donald Trump has invoked China: "They have bridges
that are so incredible," he told a South Carolina audience this
year. "They have railroad trains that go 350 miles an hour."
But the engineering that helps the country maintain its
reputation as the world's superbuilder is now increasingly
financial.
The 400-foot JinQing Harbor Bridge under construction in this
small seaside city 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. Meanwhile, individual investors risk losing
their savings if the deals go bad.
Xie Meiping, the roadway project's finance chief, said Bank of
China conceived of the financing deal to address tight finances in
Wenling. She played down risks and said the arrangement benefits
everyone by supporting the construction company and getting the
work done.
"The nation is investing a small amount of money, while society
is providing most," Ms. Xie said.
Bank of China declined to comment.
Industrial funds, known as chanye jijin in Chinese, are a legal
and popular workaround in a country that is simultaneously addicted
to boosting growth through infrastructure spending but also worried
that money is being squandered on needless projects.
Hundreds of industrial funds have been launched. They back new
renewable-energy projects in Guangdong, a port expansion in
Shanghai, a high-technology manufacturing push in Hubei province,
and a $45 billion effort to construct housing, wastewater treatment
and elder-care facilities in Henan.
"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."
To establish Wenling's industrial fund late last year, the local
government contributed roughly 20% of the $190 million in seed
capital, while Bank of China put in the rest. The fund then took
control of two city-run builders--longtime borrowers of the bank
that had contracts to build three local highways including the
bridge. Since then, the bank has advertised a series of
wealth-management products online that promise an annualized return
of around 4% for a 91-day investment in preferred shares issued by
the fund.
The Bank of China Wenling City Development Fund has a six-year
lifespan, after which the city government is obliged to buy out the
bank's investment, plus an annualized 8.5% return.
Those terms make the deal look more like a loan to the city, but
don't answer where funds for repayment will be found. They also
show how, in China, the difference between public and private often
isn't clear.
"There is a division; it's just blurred," said Craig Sugden, a
private-public-partnership specialist in Manila at the Asian
Development Bank. "The government is on both sides of the
partnership."
It is unclear how much industrial funds have added to the
country's growing pile of debt. The practice compounds widely
recognized risks related to corporate and local government
borrowing, which together account for about three-quarters of the
nation's total, and the use of wealth-management products to keep
the debt off official balance sheets.
Throughout China, cities racked up debt so fast building
infrastructure that the central government in 2004 banned them from
direct borrowing and then in 2014 forbid certain indirect
borrowing, actions that gave rise to the industrial-fund trend.
Wenling, which long specialized in shoemaking, has gussied
itself up by making its seashore and a hillside of rock formations
visible from Ms. Xie's office more accessible to tourists. It is
already served by a regional airport, and bullet trains stop in
town.
A six-lane elevated coastal highway with its own harbor bridge
opened two years ago--just a few miles to the west of the one now
under construction.
Shen Lei, a deputy finance department chief for Zhejiang
province, where Wenling is located, last month explained the wisdom
of attracting private money into public works. He cited a Chinese
proverb that translates roughly as "using four ounces to move a
thousand pounds."
Junya Qian contributed to this article.
Write to James T. Areddy at james.areddy@wsj.com
(END) Dow Jones Newswires
December 06, 2016 07:14 ET (12:14 GMT)
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