September 20, 2023

China’s $400 billion pension is another warning of debt risk

(Bloomberg) – One of China’s largest state investors adds to the chorus of debt risk warnings among the country’s money-hungry developers and local government financing vehicles.

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The National Council for Social Security Fund, which oversees about $417 billion according to the latest figures available, has advised asset managers handling its money to sell some bonds after an assessment, including those of riskier LGFVs and private developers, people said who are familiar with the case. , ask not to be identified when discussing private information. Several of them mentioned that bonds from LGFVs in Tianjin, a debt-ridden port city in the north, were picked.

The recent debt crisis of the Sino-Ocean Group Holding Ltd. raised concerns among the pension fund as one of the largest asset managers holds a large stake in the state-backed developer’s debt, the people said. That led to the request for a health check of their exposure to riskier LGFVs and builders, if relevant bond prices are below 95% of face value, the people added.

The move underscores the difficult balancing act faced by Chinese authorities as they attempt to defuse credit market risks without destabilizing the financial system. While paying off weaker bonds could help the state pension protect the value of its investments, there is a risk that the market will worry about the health of LGFVs and developers at a time when Beijing is trying to restore confidence in the world’s second-largest economy. to restore the world.

Read more: Investors cut Chinese LGFV bond yields to shortest on record

A representative for the state pension fund declined to comment. According to the latest financial report, the institution had more than 3 trillion yuan under management at the end of 2021.

“The key variables influencing China’s economic growth over the next two years will be the success or failure of local government restructuring and Beijing’s approach to the role of local government investment in China’s economy going forward. Rhodium Group researchers wrote in a recent report. “A collapse in local government investment would be similar to the economic impact of the crisis on the real estate market.”

China’s anemic economic recovery and housing crisis have fueled concerns about the explosion of local government debt, including about $9 trillion in debt from LGFVs, off-balance-sheet companies tasked with building infrastructure projects.

The city of Tianjin faced the greatest threat last year, with debt nearly three times greater than income, according to Bloomberg calculations based on available official data.

Another sign of investor mistrust of the sector’s redemption risks is that the average maturity of newly issued onshore LGFV bonds fell to 2.51 years in the first half of this year, the shortest since at least 1999 , when the Bloomberg data series began.

Meanwhile, the average coupon on LGFV yuan banknotes increased to 4.39% from 3.94% last year, while that on Tianjin was almost a percentage point higher.

Chinese authorities are showing a sense of urgency and are considering plans to support money-stressed cities and counties by allowing additional local bond issuance to help pay off hidden debts in riskier areas, Bloomberg reported last week, citing people who be familiar with the issue.

Sino-Ocean’s bonds plummeted last week after Bloomberg News reported that a shareholder-led working group hired a financial advisor to conduct due diligence and is working with major shareholders on a plan to resolve debt risks.

More broadly, a Bloomberg index of Chinese junk dollar bonds, dominated by private developers, has fallen in five of its first seven months this year, a 10% loss for 2023 so far.

(Updates with comments, prices and other details)

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