China’s $400bn pension sends fresh warning of debt risks

(Bloomberg) — One of China’s biggest public investors is adding to the chorus of warnings about the debt risks of the country’s cash-strapped developers and local government financing vehicles.

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The National Social Security Fund Board, which oversees about $417 billion according to the latest figures available, has advised asset managers handling its money to sell some bonds, including those from riskier LGFVs and private developers. after a review, people familiar with the matter said. , asking not to be identified discussing private information. Several of them mentioned that the LGFV’s obligations in Tianjin, a debt-ridden northern port city, were singled out.

The recent debt rout of Sino-Ocean Group Holding Ltd. raised concerns about the pension fund because one of its largest asset managers has a large debt position in the state-backed developer, the sources said. This triggered demand for a health check of their exposure to LGFVs and riskier builders, if the prices of the relevant bonds are below 95% of face value, the people added.

The move underscores the difficult balancing act facing Chinese authorities as they try to defuse risks in credit markets without destabilizing the financial system. While unloading weaker bonds could help the state pension protect the value of its investments, it risks heightening market concerns about the health of LGFVs and developers at a time when Beijing is trying to restore the confidence in the world’s second largest economy.

Read more: Investors cut China LGFV bond maturities to shortest on record

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

“The most important variables that will impact China’s economic growth over the next two years will be the success or failure of local government debt restructuring, and Beijing’s approach to the role of local government investment in China’s economy in the future,” the Rhodium Group researchers wrote in a statement. recent report. “A collapse in local government investment would be comparable to the economic impact of the housing market crisis.”

China’s sluggish economic recovery and housing crisis have rekindled concerns about rising local government debt, including some $9 trillion in debt held by LGFVs, which are off-balance sheet companies tasked with building infrastructure projects.

The city of Tianjin faced the biggest threat since last year, with debt almost three times its income, according to Bloomberg calculations based on available official data.

In another sign of investor wariness of the industry’s redemption risks, the average duration 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 Bloomberg’s data series has begun.

Meanwhile, the average coupon on LGFV yuan notes jumped to 4.39 percent from 3.94 percent last year, with Tianjin’s rising nearly a full percentage point.

Showing a sense of urgency, Chinese officials are weighing plans to support cash-strapped cities and counties by authorizing the issuance of additional local bonds to help pay down hidden debt in high-pressure areas. risk, Bloomberg reported last week, citing people familiar with the matter.

Indicating growing stress among Chinese developers, Sino-Ocean’s bonds fell last week after Bloomberg News reported that a shareholder-led task force had hired a financial adviser to carry out due diligence and that it was working with major shareholders on a plan to resolve debt risks.

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

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