On September 21, almost two months after the July 23 Wenzhou high-speed train crash, the announcement of an investigation progress was eventually placed on Xinhua.net. However, neither the cause of the accident nor a timetable to make that public was revealed. Aside from the crash details, there’s one more thing that Chinese government anxiously wants to hide from the public eye: the debt issue of Ministry of Railways (MoR).
MoR’s debt burden increased at an average rate of 42% between 2008 and 2010 due to massive railway construction, and has piled up RMB 2.1 trillion (330 billion USD), 5% of GDP and 28% of the central government debt reported officially. The debt-to-asset ratio is now at 58.5%, approaching the 60% red line above which companies are generally regarded as risky. This excessive expansion was a result of MoR’s dual identity as major investor of railways as well as the government regulator. It was just like races where athletes and referees are from same interest group. In such case, “doping” was inevitable. Now, after 3 years of “doping”, we’re worried about MoR’s health, and hope to prevent spread of the illness.
Markets have been concerned about MoR’s debt-paying ability, especially after the train crash. In past three years, revenue grew at average rate of 14%, far from that of debt; profit was even more sluggish, with an average growth rate of 3.5%. The huge amount of existing debt, and market concerns, have led to serious funding problems for MoR, in terms of both bank loans and bonds.
On the one hand, there’s a ceiling for MoR’s bank loans, which account for about 60% of MoR’s total funding. Outstanding MoR loans held by top four state-owned commercial banks are estimated at RMB 300bn. Nevertheless, according to China Banking Regulatory Commission (CBRC), credit extended to one group client, including loans and bonds, should not exceed 15% of bank’s capital. There was rumor saying all of the “Big Four” had reached the ceiling in May. Hence, the upside for additional borrowing from banks is quite limited.
On the other hand, the outlook for issuing bonds is also gloomy. To understand this, we need to take a deep look at MoR’s activities in bond market. Ironically, with its old-dated system, MoR is a pioneer in experimenting with new products in bond market: RMB 65 billion super & short-term commercial paper (SSCP), RMB 5 billion debt through private placement (PPN). Why is MoR so eager to try new products? Would these products significantly reduce funding cost? Probably not. 90-day SSCP was issued at rate as high as 5.55%. Actually, they are alternative instruments developed to escape the regulation of National Development and Reform Commission (NDRC): corporate bond issuers' outstanding bond amount cannot exceed 40% of net asset value. Let’s do a simple calculation: MoR had net assets of RMB 1480bn in June, which means outstanding bonds couldn’t exceed 40% of that, i.e., RMB 592bn; however, currently MoR has RMB 530bn (excluding SSCP), quite close to the limit. This is the main reason why MoR has turned to SSCP and PPN for financing, since they are excluded from the restriction. In the absence of asset injection or debt separation, it would be hard for MoR to finance through bonds in following years.
Corporate bond matures in more than 10 year; medium term note (MTN) ranges from 5 to 10 years; short-term commercial paper (SCP) is often less than 1 year; super & short-term commercial paper (SSCP) usually lasts less than half a year.
Such huge debt and serious funding problem is by no means faced solely by MoR. Since MoR is directly under the State Council, its debt is widely viewed as guaranteed by central government credit. Hence, this huge debt burden is essentially on China central government’s shoulder. Anyone interested in China’s real debt conditions should never ignore this issue.
Central Banking Seminar