China’s swelling local-government debt is spurring speculation that authorities could sell some of their holdings of listed shares, estimated by UBS AG to total at least 5 trillion yuan (US$820 billion), to make repayments.
Partial divestment of governments’ stakes in state-owned companies is one option to address the debt issue, said Yao Wei (姚煒), China economist at Societe Generale SA in Hong Kong.
Local governments have already made some sales over the past two years and repayment pressures mean that more are likely, said Chen Li (陳李), a Shanghai-based analyst at UBS.
Officials have the option of turning to the stakes as income from land sales falls and a forthcoming national audit, the broadest in two years, puts a spotlight on regional borrowing.
Local-government funding was ranked as most in need of reforms, according to a survey of analysts by Bloomberg News ahead of a key Chinese Communist Party meeting this month to discuss economic policies.
“Local governments have various entities and agencies, from pension management bureaus to state-owned asset supervision bodies, to hold shares,” Yao said.
“One thing is for sure — the number is in the trillions,” said Yao, who estimated the stockpile at 3 trillion yuan as of 2011.
China’s National Audit Office has submitted its report on local-government debt to the State Council and the level of borrowings exceeds 14 trillion yuan, Caijing reported earlier this week on its Web site.
Divestment of government shares is a long-term process and won’t be conducted in a “big bang” way, Yao said.
“If local governments come out and announce big share-sale plans, it will send jitters through retail investors and cause stock prices to plunge,” she said.
Chen, head of China equity research at UBS Securities, said sales of equity stakes would “probably continue for a while.”
Governments can sell shares on the market or can tap buyers such as private-equity companies, foreign investors or company management, Chen said.
Zoomlion Heavy Industry Science and Technology Co (中聯重工科技), China’s biggest construction-equipment maker, is an example of a company partly owned by a government. Hunan State-Owned Assets held 19.97 percent of the A-shares listed in Shenzhen as of April 2, according to data compiled by Bloomberg. The government of Hunan Province owned 16.2 percent of Zoomlion at the end of last year, according to the company’s annual report..
The largest shareholder in Bank of Chongqing Co (重慶銀行), which will begin trading next week after an initial public offering, is the city government, according to the bank’s prospectus.
China in July ordered a nationwide review of local-government debt, which the National Audit Office said in 2011 totaled 10.7 trillion yuan.
Yao said other options for dealing with the debt include restructuring it using tools such as securitization and having the central government assume the debt.