Politic,China Cities Sell Land at Winnetka Values With Bonds Seen Toxic

Politic,China Cities Sell Land at Winnetka Values With Bonds Seen Toxic-Workers toil by night lights with hoes,carving out the signs for Olympic rings in front of an unfinished 30,000-seat stadium,bulb-shaped gymnasium and swimming complex in a little-known Chinese city.
Loudi,home to 4 million people in Chairman Mao Zedong’s home province of Hunan, is paying for the project with 1.2 billion yuan ($185 million) in bonds,guaranteed by land valued at $1.5 million an acre. That’s about the same as prices in Winnetka, a Chicago suburb that is one of the richest U.S. towns,where the average household earns more than $250,000 a year.
In Loudi,people take home $2,323 annually and there are no Olympics here on any calendar.

“The debt isn’t a problem as Loudi is not a developed place,” Yang Haibo, an official at the city’s financing vehicle, says as he sits with colleagues in a smoke-filled meeting room under a No Smoking sign. “It’s an emerging city.”
A 3,300-mile (5,310-kilometer) tour of three cities in China, coupled with reviews of dozens of Chinese-language bond prospectuses that offer an unusually transparent view into local government debt, shows just how widespread such borrowing has become. In China, as in the U.S. before the collapse of the subprime mortgage market in 2007, local debt is backed by collateral that is overvalued, may be hard to sell and, in some cases, doesn’t exist.

Officials in Loudi, whose colonnaded government building is locally nicknamed the White House, value their 18 tracts of land at almost four times what a similar plot sold for in May. In the northeast city of Cangzhou, the man in charge of the assets financing a port expansion can’t locate the land his company posted as collateral for a 1 billion-yuan bond sale. And a spending spree in Yichun, a district on the Russian border covered by ice much of the year, is backed by promises of future land sales that officials acknowledge may never materialize.

‘Huge Myth’

More than 400 billion yuan of municipal bonds sold since 2008 -- part of as much as 14.2 trillion yuan in local borrowing -- show how much local officials rely on their own forecast that land prices will continue to rise. Efforts by the central government to cool the property market so far have had no impact on their bullish estimates.

Residential land sale values slumped 30 percent this year as local officials increased sales to pay back loans, according to Credit Suisse Group AG.

“It’s a huge myth that land sales are going to be able to even support the interest payments let alone the principal payments,” says Stephen Green, the Hong Kong-based head of Greater China research at Standard Chartered Plc. His research team assumes that at least 4-6 trillion yuan of local government loans -- and possibly much more -- will ultimately not be repaid by the projects, Green wrote in a June 29 report on China’s debt.

Echoes of U.S. Crisis
Local governments set up more than 10,000 so-called financing vehicles in the past decade to get around laws prohibiting them from taking direct loans. One third of them don’t have cash flow to service their loans, China’s banking regulator says.

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