Pay back time for the Beijing Olympics – Victor Shih

Bonds from 15 local government agencies worth US$ 2.5 billions to finance the Beijing Olympics are due, and financial and political analyst Victor Shih tells Bloomberg that is reason enough to keep a close eye on how China is going to pay back its debts.

Bloomberg:

“The Olympics was a spectacular event for China, but now Beijing has to deal with the hangover because of high borrowing to finance the event,” said Victor Shih, a professor at Northwestern University in Evanston, Illinois who analyzes China’s local government finances. “Bond yields are heading up, so refinancing will be much more costly.”

The yield top-rated companies must pay on 10-year bonds has risen 74 basis points, or 0.74 percentage point, this year to 5.88 percent and touched 5.92 percent on Aug. 4, according to Chinabond data. Borrowing costs for similarly ranked U.S. companies have dropped 84 basis points to 3.12 percent in the same period, Bloomberg data show…

“Beijing runs perennial budget deficits like most other cities in China, which means any sizable bond redemption would put a severe strain on the city’s budget,” Shih said by e-mail. Authorities will “need to be very inventive in repaying the coming waves of redemptions.”…

Investors “should pay close attention” to what strategy Beijing takes as it tackles its debt burden, according to Northwestern University’s Shih.

It may involve “stripping cash-generating assets from the city’s other state-owned enterprises to help restructure the debt,” he said. “But when this is done, people continue to borrow and the pool of illiquid loans gets larger and more unknown.”

More at Bloomberg

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.