China's $400 billion pension sends new warning over its debt risks

By Bloomberg News
 

One of China’s biggest state-run investors is adding to the chorus of warnings over debt risks at the nation’s cash-strapped developers and local government financing vehicles.
 

The National Council for Social Security Fund, which oversees about $417 billion according to the latest available figures, has advised asset managers that handle 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 bonds from LGFVs in Tianjin, a debt-saddled northern port city, were singled out.

The recent Sino-Ocean Group Holding Ltd.’s debt rout raised the pension fund’s concerns as one of its biggest asset managers holds a large position in the state-backed developer’s bonds, the people said. That triggered the request for a health check of their exposure to riskier LGFVs and builders, if relevant bond prices 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 the credit markets without destabilizing the financial system. While offloading weaker bonds may 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 confidence in the world’s second-largest economy.

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

Sino-Ocean’s bonds plummeted last week after Bloomberg News reported that a shareholder-led working group engaged a financial advisor to conduct due diligence and that it’s working with major shareholders on a plan to resolve debt risks.

China’s anemic economic recovery and housing crisis have rekindled concerns about ballooning local government debt, including some $9 trillion of debt held by LGFVs, which are off-balance-sheet firms tasked to build infrastructure projects. 

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

Chinese authorities are weighing plans to support cash-strapped cities and counties by allowing additional local bond issuance to help pay down hidden debt in higher-risk areas, Bloomberg reported last week, citing people familiar with the matter.