(Bloomberg) -- China’s Guangdong province is preparing to sell bonds to repay debt, a move that analysts say signals the start of the country’s latest effort to reduce hidden debt of local governments and pay back money owed to firms.
The southern province will issue three refinancing bonds next week worth a total of 16.9 billion yuan ($2.4 billion), according to a statement posted on ChinaBond’s website, which is run by the country’s central clearing house. The notes will have tenors of seven to 15 years, a separate document shows.
The announcement comes less than a week after China’s Finance Minister Lan Fo’an said local governments will be allowed to tap 400 billion yuan in unused bond quota from previous years to boost their financial resources, and repay existing debt and arrears to companies. It’s part of Beijing’s latest policy efforts to curb financial risks, improve private sector confidence and buttress economic growth that likely slowed to the weakest in six quarters.
“Guangdong’s issuance probably kicks off the tapping of the newly-added special refinancing bond quota for this year,” Huachuang Securities Co. analysts including Zhou Guannan wrote in a report Thursday, referring to the 400 billion yuan figure.
The funds are likely to be used mainly to repay money owed to companies, according to the analysts, given that Guangdong was the first provincial-level government to say in 2021 it has eradicated all “hidden debt.”
Hidden debt refers to the off-balance-sheet borrowing of local authorities. Most of this is linked to local government financial vehicles, which are formed for the purpose of borrowing money on behalf of provinces and cities. The money is then invested in local infrastructure development such as roads, bridges, airports and industrial parks.
The International Monetary Fund estimates LGFVs had over 60 trillion yuan ($8.43 trillion) of debt as of last year, equivalent to about half of China’s gross domestic product.
Another region — Xinjiang in northwestern China — also plans to sell two 10-year refinancing bonds worth 9 billion yuan next week to repay debt, according to filings on ChinaBond’s website.
China has made reining in local debt risks a key policy focus, with Minister Lan promising a one-time, large-scale expansion of a debt swap program to allow local governments to bring the hidden debt onto their balance sheet. This is aimed at easing the debt repayment pressure of local officials and allow them to channel resources toward bolstering economic growth.
The new debt swap could reduce interest costs for local governments and extend their loan repayment timelines as borrowing terms are renegotiated. It may also stabilize the business environment by helping regions pay back debt to firms, easing the pressure on aggressive tax collection and harsh penalties.
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