OREANDA-NEWS. October 03, 2013. At the executive meeting of the State Council held in late June of this year, Premier Li Keqiang proposed the study and implementation of accelerating shantytown renovation. At the meeting, six policy support measures were put forward, one of which involved guiding financial institutions to enhance funding support for shantytown renovation.

As the leading bank supporting shantytown renovation, China Development Bank (CDB) is actively exploring innovative models and long-term mechanisms for risk control and sustainable business while also increasing lending. At the same time, the National Development and Reform Commission (NDRC), acting as the competent administrative department for corporate bonds, is also contemplating ways to use bonds to guide social funds to proactively participate in shantytown renovation as well as properly control platform debt risk. Hence, the pilot "bond-credit combination" program has become a tangible exploration aiming to "stabilize growth, adjust structure and promote growth".

On July 16, following approval by the National Development and Reform Commission, "Yueyang City Investment Bond 13" was successfully issued with CDB as the "Comprehensive Financing Coordinator" and China Development Bank Securities as the main underwriter. The first "bond-credit combination" pilot corporate bond, it ending its offering early, and with an interest rate of 6.05%, lower than both conventional bonds and market expectations, the issuance was a great success. The bond issued an amount of RMB 1.8 billion for a term of 7 years, raising money mainly for the renovation and infrastructure [RC1] projects of 15 shantytowns including Yunmeng New City of Yueyang, Hunan.

On August 26, "Tongling Construction Investment Bond 13" was also successfully issued under conditions of tightening market funds. This indicates that the "Bond-Credit Combination" pilot corporate bonds undertaken by CDB in collaboration with the NDRC have achieved very positive results through applying bond-credit pooling management to the financing platform, enhancing the standardized operation and sustainable development capacity of the platform, establishing healthy vehicles for shantytown renovation and supporting shantytown renovation with mechanized channels attracting investment from the dual sources of the credit and bond markets. The unique bond-credit pooling management mechanism developed by CDB has not only received widespread recognition, its implementation has proven the immense significance of the introduction of "bond-credit combination" corporate bonds for supporting the construction of local shantytown renovation projects, effectively controlling local government and platform debt risk, protecting the interests of investors and increasing investor confidence.

Tongling Shantytown Renovation Sample: The Financial Gap Between Ideals and Reality

Tongling, in Anhui Province, is a typical old, resource-exhausted industrial city. As its resources dwindled, debt arose as a prominent problem of daily life and the task of shantytown renovation became onerous. Renovated shantytowns make up 70% of the city's total subsidized housing and are characterized by their great quantity, number of locations and large areas. Of the 56 shantytowns in the city, 70% are in independent factory and mining areas and geological disaster areas far outside the city. Especially for the mine shantytowns that date back over 30 years, renovation is extremely urgent.

In 2007, Tongling led the province in establishing a housing assurance leadership team for preliminary survey of and formulation of policies regarding shantytown renovation. In 2010, Tongling explicitly listed shantytown renovation as its "Number One People's Livelihood Project", proposing to complete shantytown renovation within three years in accordance with its guiding principle of "government leadership and market operation". As of the end of 2012, all but four of the 33 shantytown renovation projects included in the city planning were commenced, and the four excluded were suspended due to lack of agreement among residents and geological disasters. The construction area totaled 2.89 million square meters, and renovation of dispersed shantytowns and dangerous houses was also fully put into motion. In 2013, Tongling has planned to commence construction of 14,127 units of resettlement housing and complete basic construction of 8,035 units.

However, Tongling's shantytown renovation has also encountered difficulty in financing. To relieve the huge financial pressures of shantytown renovation, Tongling raised funds through a variety of channels, adopting an approach of "providing support through policy exemption and reduction, having enterprises share reasonably with residents, raising funds through market operation, soliciting help from higher authorities and financing through diverse channels". However, the gap was still big, affecting the progress of renovation. Recently, Tongling has adjusted its shantytown renovation target to "completion of all major shantytown renovation and resettlement by the end of the 12th "Five-Year" period and completion of the renovation of scattered shanty areas (including dangerous and old houses) and villages in city by the end of 2017", which is far later than the original target proposed in 2010 to "complete shantytown renovation within three years". Since Tongling's shantytown renovation is of representative and typical significance, its difficulty of financing has drawn concerns from the central government.

Bond-Credit Pooling Management: A Beneficial Trial in Balancing Development Promotion and Risk Prevention

Since the local debt risk drew continuous concerns and some platforms were observed with such problems as multisource financing, disordered financing, overfinancing, extend use of short-term funds and lack of investor protection, investor confidence in the platforms was affected, resulting in a shortage of funds for shantytown renovation. "To attract investment, it is currently urgent to build mechanized channels beneficial for resolving the current problems with the platform as well as for controlling future risk. This will help recover the confidence of investors and thus restore the ‘transfusion' function of the market in shantytown renovation, which is our aim in innovating the mechanism of bond-credit pooling management," says Wang Xuedong Governor of CDB Hunan Branch.

In the view of professionals, through "bond-credit combination", an effective juncture was found for supporting local economic development as well as preventing debt risk. By exploring bond-credit pooling, the comprehensive advantages of CDB in mid and long-term lending, financing platform debt management and bond issuing and underwriting have been fully utilized, and a good model has been established for the use of financing in supporting development and preventing risk. Additionally, "bond-credit combination" is beneficial for uniformed monitoring and synchronous positioning of control of bond-credit funds, for shortening construction periods and reducing construction risk, as well as for preventing and controlling local government and financing platform debt risk, protecting the interests of investors and enhancing their confidence.

According to one securities research expert, CDB has made it clear that no guarantee in any form will be provided for repayment of bond principal and interests and no institutional credit will be provided for the bonds, and yet investors are still willing to subscribe at a lower interest rate, mainly because they recognize the crediting effect of the mechanism. First of all, they accept the mechanism: the mechanism is uniquely and objectively designed the effectively improve existing problems with the platform and reduce solvency risk. Secondly, they trust CDB: as the leading bank in platform loans, CDB is experienced in risk control and management, and its platform plays the role of risk-base stabilizer on a mid and long-term basis, without any short-term impulsion or ethical risk. Therefore, it is second to none as candidate for platform financing coordinator.

As for local governments, bond-credit pooling makes local economic development sustainable. By making full use of its advantage in mid and long-term crediting banking, bond banking and comprehensive financial service, CDB guides different types of funds in providing long-term, stable and low-cost financial support for shantytown renovation and other major projects to ensure projects' funding chains will not brake, as well as to prevent unfinished projects and promote the early completion projects. Therefore, since its introduction, various local governments and platforms have successively expressed willingness to pilot the mechanism.

"It is not only meant to relieve current funding pressure, but also to enhance the capacity for subsequent sustainable development," said one platform principal. "We prefer to choose CDB as the comprehensive financing coordinator for reasons that include: (1) the two parties have cooperated for long periods with smooth communication; (2) CDB has had many successful experiences and is sophisticated in project operation; (3) CDB shows consideration for the overall situation, not proving an umbrella on a sunny day but rather saving the umbrella for a rainy day, as is most important for us."

However, the favor of local governments and platforms for CDB has also triggered the worries of individual institutions about the possible monopoly of platform business by CDB. President of CDB Anhui Branch Song Weinong explained, "the mechanism is designed according to market-based and "opening" principles, without any fence or exclusive terms other than the necessary definition of rights and responsibilities. We hope more institutions and products will enter in an orderly way on the premise of controlling the whole to enhance the capacity of platforms for regular and sustainable development."

Platform Debt Predicament: Alleviation May Be the Only Way Out

In the view of market participants, the bond-credit pooling management mechanism is widely favored for its energetic support of development in bottleneck areas while proactively preventing and resolving platform debt risk. It accurately masters the crux of platform debt from a historical and development point of view and, by treating symptoms and alleviating blockage through targeted mechanism design, has a resuscitative effect.

As is widely known, China is now and will remain, on a long-term basis, in a period of reform and transformation. Its market mechanisms await improvement, and various problems are in urgent need of resolution, including shantytown renovation, the financial failure of local governments, and an unwillingness of social capital to involve itself in bottleneck areas. The platform will continue to play an indispensable role for a significant period of time before the financial and taxation systems are perfected and local governments are permitted to raise funds. It is critically important to squarely face, prevent and solve platform debt risk, as well as establish a platform facilitating healthy operations and regular development.

Currently, platform debt risks are observed objectively, and are mostly structural and liquidity risks in addition to the risk in total volume. In the circumstance that the platform has an inadequate "generative" capacity, it is necessary to take emergency measures to recover the "transfusion" function of the market. Fencing and blocking without dredging may cause the "reservoir" to breach, creating systematic and regional risks. However, viewing the factors causing platform debt risks, there was short-term impulse for expansion of investment demand during the international financial crisis, but also such long-term and institutional factors as taxation and finance. Such risks cannot be solved overnight, but need to be gradually digested while controlling the whole by establishing a permanent mechanism; only then can space for reform can be obtained over time.

However, with financial development expanding and platform financing channels diversifying, actively preventing, controlling and steadily solving platform debt risk is a serious challenge. The mainstay institutes have been fully aware that they can hardly maintain a risk control mode of "minding one's own business" and regulatory model of "doing one's own business", and must establish a comprehensive multi-level management system. If platform debt pooling remains limited to the guidance of the regulatory agency and governmental departments, without the positive involvement of financial institutions, such pooling will lose its foothold. Therefore, research regarding enhancing the overall management capacity of financial institutions for platform debt should be included in planning as soon as possible. Since banks have the advantages in information through their long-term proximity to the platform and local governments as well as their relatively high capacity for total risk management, bank pooling is the most realistic and optimal choice for present platform debt pooling.