The financing arms of several local governments could head offshore to sell bonds to fund rail projects, following a track laid by Beijing Infrastructure Investment Co. Ltd (BII), according to Gloria Lu, corporate ratings director of Asia-Pacific Standard & Poor’s (S&P) Ratings Services.
BII, the builder of Beijing’s subway, sold 1.2 billion yuan (US$193 million) of three-year securities at 3.75 percent in Hong Kong last Thursday in the first part of its US$2 billion mid-term note program. Another US$300 million in five-year bonds were issued at 3.625 percent in March, the first time a Chinese subway company had tapped the overseas bond market.
The rates are well below the urban construction investment bond level of about 7 percent, Caijing reported Thursday, citing a business insider.
On the mainland, local governments usually hold rail assets via companies like BII, backing the expansion and operation of those companies through loans and subsidies. As of June 2013, Beijing rail transit projects had racked up about 151.9 billion yuan in debt, accounting for about 20 percent of the total amount of the city government’s debt.
But as local governments come under increasing debt repayment pressure, they are likely to cut financing support for these projects, Lu said Wednesday.
S&P projects that up to 2.5 trillion yuan will be needed to fund China’s planned new rail transit projects between 2014 and 2020, up to 40 percent of which will have to come from local governments before 2015.
And so local government investment vehicles are looking to the overseas bond market in the quest for broader financing channels and lower funding costs.
Liang Zhong, director of sovereign and international public finance ratings at S&P Asia-Pacific, said credit risk is one of the most important criteria for such bodies in selecting overseas financing channels.
The authorities are also considering changes to subway ticket pricing and letting subway companies diversify their businesses to boost revenue, Lu said.
According to S&P estimates, Beijing should at least double its subway ticket price to cover the system’s operating costs. It now costs 2 yuan to ride anywhere in the system and mainland media report that the municipal government has had to subsidize the system to the tune of 2 billion yuan a year to pug the gap between ticket prices and operating costs.
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