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An Analysis of the Financing Platform Viewing from the Angle of State-owned Assets
2011-12-06
By Zhang Wenkui, Enterprise Research Institute of DRC
Research Report No 115, 2011
I. Essence of the Financing Platform and Its Similarities to and Differences from Ordinary State-owned Enterprises
The outbreak of the global financial crisis in 2008 hit the Chinese economy heavily and the government subsequently put forth an economic stimulus plan of 4 trillion yuan, focusing on a mass infrastructure construction. In order to push forward the infrastructure construction, local governments had relied on what is called the financing platform to gain large amounts of loans from banks and managed for financing through other channels on the market. The financing platform has aroused extensive attention and become a hot topic among the research circles. Research results show that the financing platform is exposed to many risks. Nevertheless, different opinions have existed in the specific assessments of the risks. One of the important causes for the different views is that the analyses conducted have given rise to substantially different understandings and recognitions of the financing platform, which will not only affect the risk assessment, but will even make it difficult to accurately calculate the number of financing platforms and the aggregate loans. Some literature are of the opinion that the number of financing platforms has reached seven to eight thousand even surpassed ten thousand in China, with the total amount of loans reaching seven to eight trillion yuan or even in excess of ten trillion, while other literature reckon that there are only several hundred financing platforms in China with the loans totaling two to three trillion yuan. I am of the opinion that the analysis of the essence of the financing platform and the distinguishing of the financing platform from ordinary state-owned enterprises are conducive to a clearer research of the financing platform and to the assessment of its risks.
What is now called the financing platform usually refers to the state-owned enterprises set up by the government and in charge of providing financing for infrastructure construction. Conventional wisdoms indicate that the financing platform itself is not involved in regular business operations and is not even aimed at specific projects. However, in reality, since quite a number of state-owned enterprises are involved in infrastructure construction, public utilities and competitive industries and, in particular, some localities have often integrated the state-owned infrastructure assets, state-owned public utility assets and state-owned assets of competitive industries, so the financing platform has been mixed with many state-owned enterprises. What merits attention is that it is generally acknowledged that the risk from the financing platform is mainly that the infrastructure financed by the financing platform cannot generate continuous cash flows and, at least, the cash flows are not enough to repay the loans and interests. But nowadays in China, many infrastructure facilities are being handled in a commercialized way (such as the toll expressways) and public utilities enjoy all the more stable cash flows, which has obviously made the financing platform more complex. Moreover, sometimes it is difficult to completely separate the infrastructure facilities from the public utilities and public utilities are sometimes entangled with competitive business, thus making it difficult to evaluate the cash flows of the infrastructure and the financing platform.
As early as in the 1990s, infrastructure, public utilities and competitive business in some cities formed, through integration and reorganization a new state-owned platform enterprise so as to get listed for financing, to issue bonds and gain an access to bank loans. Shanghai Jiushi Corporation is a case in point. In fact, a more meaningful case is the formation and listing of the Beijing Enterprises Holdings Ltd. In 1997, by baling and restructuring, the Beijing Municipal Government turned, through integration and reorganization, some of the state-owned enterprises and assets into the Beijing Enterprises Holdings Ltd. and had it listed in Hong Kong. There were then 8 state-owned enterprises under the Beijing Enterprises Holdings Ltd, including such infrastructure assets as the Capital Airport Expressway as well as such state-owned assets of competitive industries as Beijing Yanjing Brewery, Beijing Wangfujing Department Store Group Co. Ltd. and Beijing San Yuan Foods Co. Ltd, etc. Over more than one year's time since its listing in Hong Kong, the Beijing Enterprises Holdings Ltd. successively raised funds twice totaling 4 billion yuan, with quite a part of the funds being invested in the upgrading of the Capital Airport Expressway, and 1.5 billion was invested in the purchase of Beijing No. 9 Water Factory to get involved in the field of public utilities. In 2005, based on the Beijing Enterprises Holdings Ltd, the Beijing Municipal Government made an integrated restructuring of Beijing Holdings Ltd., Beijing Enterprises Holdings Ltd. and Beijing Gas Group Co. Ltd. to form the Beijing Enterprises Group Company Ltd., which is an investment and financing platform set up by the Beijing Municipal Government and the Beijing Municipal State-owned Assets Supervision and Administration Commission for infrastructure construction and public utilities in Beijing and whose main business includes the investment in and the operation and management of the infrastructure facilities and public utilities in Beijing. The Beijing Enterprises Group Company Ltd. owns dozens of enterprises including Beijing Gas Group Co. Ltd., Capital Airport Expressway, Beijing No. 9 Waterworks and Beijing Yanjing Brewery. Obviously, the assets of this financing platform have, true to its name, covered infrastructure facilities, public utilities and competitive industries and the platform also owns the Beijing Enterprises Holdings Ltd., an enterprise listed overseas.
During the 1990s, in the course of reorganization, many listed Chinese state-owned holding companies brought in state-owned public utility and infrastructure assets one after another, including fuel gas, electric power, tap water and expressways, etc.. State-owned enterprises in many cities, such as Changsha, Chengdu and Shanghai, were reorganized in that way.
Nonetheless, there must be stable cash flows for the state-owned assets needed for the formation of the listed financing platforms. Therefore, most of the municipal administration assets that can be injected in listed financing platforms are confined to public utility assets with stable cash flows, such as tap water and fuel gas, as well as commercialized infrastructure assets, such as toll expressways and airports with large handling capacity.
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