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News, page 4, issue 463, April 2, 2010 Translated by Tang Xiangyang Polished by Rose Scobie Original article: [ Chinese ] A notice titled, "Standard Notice to the State Council Pertainingto Problems Related to Providing Direct or Indirect Guarantees forLocal Governments and Financing Platforms," has been submitted tothe State Council. The notice was drafted by the Ministry ofFinance (MOF) and signed by the National Development and ReformCommission (NDRC) and related departments. According to a sourceclose to the MOF, there is still much debate over what impact thenew rules will actually have. The notice forbids local governments and public institutions fromproviding direct or indirect guarantees for enterprises or localfinancing platforms. Since over half of the debts used by localgovernments to promote urban construction (known as urbanconstruction bonds, ) are directly or indirectly guaranteedby local governments and public institutions, the notice has shakenmarket faith in the quality of these bonds. However, a source toldan EO reporter, if the issuance of bonds is carefully consideredand supervised, the risks can be controlled. A source close to theNational Development and Reform Commission also confirmed that theNDRC is actually accelerating the process of issuing such bonds. Issuing of Bonds Will Not Be Effected Both the MOF and NDRC have continually warned of the potentialrisks associated with urban construction bonds. But according tothe above source, even within the MOF and NDRC some people stillconsider the bonds to be a reasonable financing channel, thoughthey agree that the risks need to be strictly managed. The NDRC intensified supervision of the issuing of urbanconstruction bonds since the end of last year, requiringprefecture-level cities to issue only one such bond and provincialcapitals to have no more than two. Officials with the NDRC haverepeatedly issued public statements warning against the risksassociated with the bonds. The above measures have led the NDRC to believe that the risksassociated with such debt instruments can be controlled. In fact, from the issuance of urban construction bonds, our sourcerevealed, we can see from the current process by which qualifiedurban construction bonds are approved, that the approval processhas been sped up, so much so that bonds left unaproved last yearhave already entered the approval process this year. An insider said, more than 100 urban construction bonds issuancesmay take place this year. China's Banking Regulatory Commission (CBRC), along with the MOFand related agencies under the State Council, have beeninvestigating local financing platforms and coordinating with localgovernments in order to prevent and control risks. Currenly, their a four types of local government debt instrumentsthat are being audited and cleaned up: bonds issued by publicinstitutions that have been subsidized by local governments , bondsissued by local financing platforms to support public projects thatrely on the injection of government funds to be paid off; bondsthat are issued by local financing platforms to construct publicprojects that raise a steady cash flow and rely mainly on profitsto be paid off and debts issued by local financing platforms toconstruct competitive projects. According to an insider, the MOF's plan to reorganize existingfinancing platforms aims to eliminate those local platforms thatprovide financing for public projects but bear no responsibilityfor construction and rely mainly on fiscal revenue in order to meettheir debt obligations. After the reorganization, the MOF alsoplans to standardize those local financing platforms that financepublic projects but that have a steady revenue stream that they candepend on to pay off their debts, along with those platforms thatmainly provide financing for competitive businesses. These twokinds of financing platforms will also be prohibited from relyingdirect or indirect guarantees from local governments to raisefunds. Risk from Bank Loans Even Greater It's widely believed among regulators, market participants andcredit rating agencies that local financing platforms are mostexposed to risk in terms of bank loans. Debt researchers of securities firms are still recommendingexisting urban construction bonds to investment agencies and thefixed income departments of some funds and securities firmscontinue to favor investing in these urban construction bonds. After the MOF announced that it would standardize local financingplatforms, the secondary bond market entered a period of "wait andsee". At the time of the MOF's announcement, a bond manager of afund company located in Beijing said he had no idea about whetherto buy or sell urban construction bonds. But presently, everyone is still relatively optimistic about theprospects of urban construction bonds. The debt manager mentionedabove has resumed buying the bonds. The risks of local financing platforms have gained the attention ofStandard and Poor's (S&P), a company which specializes infinancial market ratings, which warned in a recent report that inthe climate of readily available credit, a proportion of theselocal financing platforms had raised capital to fund publicconstruction projects, and this may have led to the creation of amassive amount of bad loans. The S&P report emphasised that most of the risk wasconcentrated in loans acquired by these local financingplatforms.This view was echoed by an analyst at a securities firmwho said in terms of the concentration of risk and amount of fundsinvolved, urban construction bonds are much less risky than thebank loans. China's Banking Regulatory Commission (CBRC) has also urged allbanking institutions to guard against and control loan risksaccumulated through financing local government constructionprojects and has required banking institutions to completelyevaluate and effectively guard against risks concerning localgovernment financing platforms, and to intensify their follow-upsupervision on loans. The CBRC is also urging banks to co-issueloans to limit the degree of risk concerning large-scale andhighly-concentrated loans. The CBRC also requires banks to obey three rules when providingloans for local financing platforms: First, bundled loans areprohibited; second, credit agreements signed with local governmentsconcerning a large amount of money without outlining specifiedprojects are prohibited; third, banks should strictly restrictproviding loans to financing platforms with no real capital,management structure, internal control, risk management, strongcapital supervision system, or strict loan restrictions.Additionally, the CBRC urges banks to immediately make a concreteagreement with financial platforms to safeguard against risk. I am an expert from vacuum-circuit-breakers.com, while we provides the quality product, such as China Medium Voltage Circuit Breaker , Indoor Vacuum Circuit Breaker Manufacturer, High Voltage Circuit Breakers,and more.
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