Investors Warn Risks In China’s Public-Private Partnership Boom

A boom in China’s public-private partnership projects have led many investors to warn hidden financial risks and whether these government-led funds can fulfill their return promises.

At the end of 2015, there were a total of 780 PPP funds with aggregate capital of RMB2.18 trillion in China.

But 40% of those were established in 2015, with 297 funds with RMB1.51 trillion launched last year. These two numbers were 283% and 524% higher than those in 2013, respectively, according to Chinese data tracker Zero2IPO.

As the number of PPP funds and their committed capital soared, many investors are concerned if proper systems are put in place to protect investors and if these government-led vehicles can invest their capital efficiently.

"(Some problems relating to these funds) are fee structures. Management fees are split half and half, and often take a long time to be settled," SAIF Partners’ Andrew Yan was quoted in an Caixin article.

"Top-tier funds will not agree to these kind of terms. But many new funds and little-known small funds will agree and participate. That may lead to unsound investment decisions and may drive up asset prices," Yan added.

Hubei Province’s Yangtze River Economic Zones’ Industrial Fund

At the end of 2015, the Hubei provincial government launched Yangtze River Economic Zones’ Industrial Fund, hoping to use RMB40 billion seed capital from its fiscal budget to leverage RMB1 trillion (US$154 billion) investment into its economy.

The government’s plan is to establish a series of fund-of-funds with total assets of RMB200 billion from government capital, bank loans and private capital.

The next step is to further attract private capital to establish more funds under those fund-of-funds with combined capital of RMB400 billion, then use leverage to drive RMB1 trillion into the real economy.

The Pyramid Structure of Yangtze River Economic Zones’ Industrial Fund


(Source: The People’s Government of Hubei Province. Unit: RMB100 million)

Two week ago, the Hubei provincial government announced the establishment of nine fund-of-funds, including a RMB20 billion fund jointly launched by the Yangtze River Economic Zones’ Industrial Fund and Ping An Securities.

The joint fund said it had 23 potential target funds that it hoped to back with total committed capital of RMB130 billion.

History of China’s PPP Funds

In 2002, the administrative committee of Zhongguancun in Beijing established Zhongguancun Venture Investment Guidance Fund, the first government-funded investment vehicle.

In 2014, the central government issued a new rule that placed higher restrictions on local governments’ abilities to establish financing vehicles, pushing cities and provinces to set up PPP funds as a means to finance projects.

Last year, the State Council launched a RMB40 billion fund to help seed companies in emerging industries and RMB60 billion to support small and medium enterprises.

In November 2015, China’s Ministry of Finance announced a new directive to encourage local governments to set up their own industry guidance funds to lead money into new and emerging industries leveraging private capital.

This led to an explosion of local government-funded PPP funds, with aggregate capital of RMB2.18 trillion in these vehicles – concentrated in Hubei, Sichuan, Shaanxi and Inner Mongolia provinces – now seeking to deploy their dry powder.

The Number Of China’s PPP Funds & Aggregate Capital


(Source: Zero2IPO and Caixin Media. Black line represents the number of PPP funds and red bars are aggregate capital)

But investors are concerned if these funds can operate efficiently as market-oriented entities. Questions also arise on where these private capitals will come from. And, are there enough good targets in Hubei province to receive RMB1 trillion investment, for example?

Are PPPs Just Another Form Of LGFVs?

Many PPP funds are directed to invest in infrastructure projects, making them essentially local government financing vehicles (LGFVs) in disguise, according to a banking executive cited by the Caixin article.

"LGFVs had governments as shareholders and their asset qualities were much better, as there was an implicit government guarantee," said this baking executive. "LGFVs were actually bank’ best quality assets."

But with PPPs, as the government’s capital only accounts to around 5% to 10% of the aggregate capital, there is not so much a government insurance.

Another banking executive told Caixin Magazine that financial risks must be reconsidered as too many governments are piling onto PPP projects.

Some PPP projects were sold to individual investors via wealth management products, leading to potential financial contagion among the general public, warns a regulator.

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