Two of Yunnan's largest bond-issuing entities have been put on a watch list by a federal credit rating agency. The move, which is unusual in China, comes as municipalities around the country are being watched for what some analysts believe could be a series of China-wide credit defaults.
Yunnan Investment Holdings Group (YIHG) and Yunnan Electric Power Investment (YEPI) were both singled out for concern by China Chengxin International, a rating agency partially owned by Moody's. Both bond entities are expected to restructure over the coming months in efforts to rebound and attract more investors.
Chinese cities such as Kunming have come to lean on bonds more and more as they raise money to fund huge infrastructure projects. The domestic bond market in China is still somewhat unpredictable as it has only been in existence for two decades.
Exact figures for how much money local governments have raised through bonds remains unknown. China Daily has quoted official figures from 2011, stating a figure of 10.7 trillion yuan (US$1.75 trillion). However, former head of the Chinese Ministry of Finance, Xiang Huaicheng, has said the number is more likely in the neighborhood of 20 trillion yuan.
Wu Zezhi, a trader at Orient Securities Company quoted by Reuters, said of the Yunnan bond downgrades:
The move is not surprising as risks in such debt have already been anticipated by the market and fully priced in. It's possible that more such [Yunnan] debt will be put on credit watch, and if you look at the market, many have already slumped as there are no investors buying.
Concern over local government bonds is growing around the country as municipal debt has grown nationally by 62 percent over the past year. Only an estimated ten percent of government-sponsored construction is now funded by private equity.
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