The southern Chinese province of Guangdong recently released guidelines encouraging the inclusion of private funds in its infrastructure financing in order to meet a shortfall in infrastructure funding partly brought about by the recent credit crunch.
The government is encouraging more “innovative” financing solutions for large infrastructure projects, including a wide range of capital market instruments. The government is particularly keen to attract trust companies and the capital of high net-worth individuals, according to Winnie Deng, an infrastructure analyst at domestic research firm Z-Ben Advisors.
According to the 12th Five-Year Plan (spanning 2011-2015), Guangdong will need RMB 3.5 trillion (€437 billion; $570 billion) in infrastructure construction. In the past two years, the province has completed RMB 1.97 trillion of that requirement, and another RMB 564 billion has already been invested – leaving the province with an RMB 1.4 trillion shortfall.
The issue Guangdong faces now, however, is a struggle to secure bank loans, Deng told Infrastructure Investor. With the recent “credit crunch” policies put forward by China’s central government, banks are being far more cautious about who they give out loans to – and provincial infrastructure projects are sometimes one of the victims, Deng said.
“Even if you’re a small government body, you can be having trouble getting bank loans, just because you have a lower credit rating,” Deng explained. In essence, releasing the guidelines is a way for the provincial government to market its “key infrastructure projects”, she said.
Deng argued that most money drawn to Guangdong’s offer will be domestic RMB capital from high net-worth individuals. The regulations surrounding China’s institutional investors are still being hammered out, such that “they can’t always invest even if they want to”; and the projects in Guangdong probably won’t be large enough to attract foreign capital, she added.
China’s infrastructure investment has to a large extent been under its government, but Deng pointed out that a large portion of that has actually been “indirectly privately funded”. Specifically, the government often takes out loans from Chinese high net-worth individuals to fund their infrastructure projects. Whereas that funding used to be channeled through banks, Guangdong is now looking to take out those loans directly from private funds.
Private funds and trusts have become quite a large pool of capital in Guangdong. Chinese financial research firm ChinaScope Financial estimates that private funds available for Guangdong’s infrastructure projects total RMB 1.2 trillion.