China Moves Closer to a Major Financial Rescue

Take a moment to hear this story: Excavators are engaged in construction on top of a structure located in the Beijing Central Business District.

 Public transportation companies in China are feeling the effects of a deteriorating economy and have been pleading for assistance from higher-up authorities. The companies have been utilizing various methods, from releasing statements to halting services, to make their distress known. The tactics seem to be working as some of the pleas have been answered. In October, two bus companies in Nanchong, located in the southwest of the country, announced that they would have to cease operations due to a lack of financial assistance from municipal governments. This action was taken in an effort to send a message to higher officials that all was not well in the provinces. There have even been some companies that have been straight-forward in their requests, warning that they can no longer meet their debt obligations. Across the nation, cadres have been appealing for assistance in both subtle and direct ways, and it appears that their efforts are being heeded.

 Beijing officials are trying to avoid the moral hazard associated with helping out failing localities, and instead are seeking to avoid picking and choosing winners. Property is at the epicenter of the issue. The past year has seen local governments take measures to try and stop construction sites from closing, such as reducing down payments and making mortgages more accessible, but unfortunately these efforts have not been successful. In November, floor space home sales dropped by nearly 20%. Moreover, the sale of land by local governments has been drastically reduced, which is a major source of income. Additionally, a huge number of firms owned by provincial officials known as local-government financing vehicles (LGFVs) are facing difficulties. Goldman Sachs has estimated that these companies have 61 trillion yuan ($8.6 trillion) in debt, which is almost half of China's gross domestic product (GDP), and they are having difficulty making payments.

 Hoping to be saved, individual property developers and small banks have asked for capital injections. On the 22nd of November, one of China's largest wealth-management companies, Zhongzhi, revealed they were "severely insolvent" and unable to pay the $36bn they owed, which instigated a police inquiry. Since the liabilities of Zhongzhi are closely connected to developers, local governments and affluent urban investors, there is the potential for a financial domino effect. Assuredly, the firm will necessitate some kind of state-sponsored rescue.

 Realizing the consequences of deleveraging in the property market, Zhang Zhiwei of Pinpoint Asset Management has questioned whether officials will succumb to the demands. Bloomberg has reported that banks are being asked to provide short-term, unsecured loans to some developers. In addition, the prices of developer bonds traded in Hong Kong have recently surged due to speculation of a list of 50 firms that would be eligible for new financing through banks, bonds and equities.

 Rumors in mid-November that the central government was going to offer low-cost financing for affordable housing and urban renovation, followed by the issuance of 1 trillion yuan in government bonds in October, have been confirmed. A significant portion of the funds will likely be used by local governments in debt repayment. The move by the central government to inject money into the system signals their determination to prevent a collapse of local governments and the property market, which will be welcomed by local administrators.

 Analysts have yet to refer to the recent moves of lgfvs as a bail-out. They have been replacing costly credits with bonds that have a lower interest rate, therefore reducing the fiscal strain felt by many towns. Nonetheless, the considerable debts are not being entirely eliminated. If the 1trn yuan for urban development happens to be a reality, it will probably motivate more individuals to purchase residences. In spite of this, millions of people are still expecting the completion of properties which they paid for in advance. A substantial number of these may not be constructed on schedule, or even at all. Zhongzhi's debts are to successful financiers and the state will likely be hesitant to come to the rescue of all of them.

 To restore confidence in the property market, developers should be granted access to ample credit. Consequently, this would lead to an increase in demand for land and more revenue for local governments. It has been suggested that organizations such as Zhongzhi might be able to recoup their debts from developers. Reports of such an effort have already been made; Shenzhen, for example, declared that it would provide adequate funds to a major local developer to prevent them from defaulting. Reuters asserted that Ping An, an insurance company, was going to bail out Country Garden, one of China's biggest developers; however, Ping An denied that statement, but the speculation has still sparked speculation that something is underway.

 The decision to give liquidity to only 50 developers points to the fact that the government doesn't want to save everyone. They are attempting to save the solvent but illiquid ones and let the insolvent ones sink. Larry Hu from Macquarie, an investment bank, stated that their unwillingness to create a last resort lender has been a hindrance. He went on to suggest that banks should be encouraged to provide loans, although this has not been successful in the past. Hu further said that the more money the Chinese administration distributes, the more people turn up asking for assistance..