The Weekly JMP Report

China Hidden Local Government Debt Is Half of GDP, Goldman Says

Bloomberg News:23

 

China’s hidden local government debt has swelled to more than half the size of the economy, according to economists at Goldman Sachs Group Inc., who said the government will need to be flexible in dealing with this as revenue is already under pressure due to a slowdown in land sales.

The total debt of local government financing vehicles rose to about 53 trillion yuan ($8.2 trillion) at the end of last year from 16 trillion yuan in 2013, the economists wrote in a report. That’s equal to about 52% of gross domestic product and is larger than amount of official outstanding government debt.

The LGFVs are a tool for governments to borrow money without it appearing on their balance sheets, but it is seen as the same as a government liability by financial markets. 

There were some signs earlier this year that government was making inroads in cutting this debt as the economy’s rebound gave room to focus on tackling financial risks. Now with growth facing more headwinds including reluctant consumers, a housing market crisis which has caused demand for land to slump, power shortages, and supply chain disruptions, markets are looking for signals of a rethink of that hawkish policy stance.

“More official local government bond issuance and increased flexibility on local government financing are probably needed to support overall economic growth” as land sales are slowing, economists led by Maggie Wei wrote in the report. 

Land sales are a major source of revenue for local governments and sales have slowed down as the crisis at property developer China Evergrande Group worsens. To make up the funding gap left by shrinking land sales revenue, Goldman recommended the government increase the bond quota for 2022 by more than 500 billion yuan from this year’s level of 3.65 trillion yuan. 

Some other findings:

• The liabilities of local financing vehicles are mostly concentrated in construction, transportation and industrial conglomerates sectors, with these three sub-industries borrowing close to 40% of the total LGFV debt
• Jiangsu tops all the provinces in the size of the borrowing, with about 8 trillion yuan in 2020
  • Tianjin, Beijing, Sichuan, Guizhou and Gansu are the most leveraged provinces as a share of local economic output
• Around 60% of the bonds issued by local platforms are used to repay maturing debt in 2020-2021, rather than new investment.

China doesn’t have an official account of local governments’ hidden debt, as it’s technically against the law, and private estimates by different institutions vary significantly. 

One estimate by S&P Global Ratings in 2019 put the size at 20 trillion yuan, while another that same year from Rhodium Group put it at 41.2 trillion to 51.7 trillion yuan. According to a government-linked think tank, there was 14.8 trillion yuan of hidden debt in 2020.

Goldman’s calculation is based on an analysis of more than 2,000 LGFVs’ statements of their interest-bearing debt, including bonds and bank loans. 

cryptocurrencies.

 

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Low-carbon energy switch not to blame for gas market volatility: IEA’s Birol

Nick Coleman

 

Speaking at the online Energy Intelligence Forum, Birol played down suggestions that the world was being caught short of energy due to an overly rapid switch to renewables, arguing demand this year had been driven partly by the highest rate of economic growth since the early 1970s, but also that gas prices might ease.

The comments come after the IEA has itself been criticized over an energy “blueprint” in May that set out a path to net-zero emissions involving no further investment in new oil and gas projects.

Birol said another contributor to high gas prices had been shutdowns in production locations such as the North Sea, where output has been crimped by operators catching up on maintenance postponed from 2020 due to workforce restrictions.

For the UK, the average NBP front-month contract price in September increased 48% month on month to 165.102 p/th, up 44% year on year compared to 2020’s pandemic-hit lows.

Birol also highlighted weather events as a “driver” of gas imports, including the lack of wind that has affected generation in Europe, and drought in Brazil and China that has reduced hydro generation. He did concede, however, that any mishandling of the energy transition by governments in the coming years would create “difficulties” for markets.

“This volatility has almost nothing to do with clean energy. The drivers are completely different. There were outages one after the other around the world, and there was a lot of maintenance work… Many things came together, but I would be surprised if the high gas prices we have now continue for a very long time,” he said.

“We are seeing 6% GDP growth globally this year, the highest since 1973, which gave a big push to gas demand growth around the world, hence we have a tightness. If the winter is harsh this tightness will continue. But I don’t see any clean energy policies that affect this.”

“If we see a very harsh winter, we may see high prices will be with us for some time to come, but there is also a good likelihood that the markets will correct itself soon through substitution or demand destruction, and after winter the situation may change,” he added.

COP26 warning

However, Birol had a warning for governments on the design of energy policies ahead of COP26 climate talks in November. “If governments make a mistake, if they don’t push demand side policies and find alternatives to oil, we may well see there will be difficulties in the markets.”

“I can assure you that we will see during the energy transition, this journey, there will be a lot of volatilities in the markets, it will not be a smooth, easy way, it will not be a rose garden, it will be a difficult one to go, we will see a lot of changes in the markets,” Birol said.

“The role of governments is to reduce this volatility as much as possible by taking the right market designs in power markets and others.”

cryptocurrencies.

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Miners scramble to develop rare earths deposits ex-China as demand, prices soar

Diana Kinch 

 

Demand surging from windpower, EVs sectors

Oxide projects considered for US, elsewhere

International mine developers are striving to bring on stream new rare earths projects outside China to secure supplies of the minerals used in electric vehicle engines and wind turbines as prices surge, CEOs of two developer companies told S&P Global Platts.

China, the principal rare earths miner, also holds at least 85% of the world’s capacity to process rare earth ores into material that manufacturers can use, typically oxides, and may in future reduce exports of these materials as its domestic demand grows, they said.

“REEs are both strategic and critical,” said Tim Harrison, managing director of ASX-listed Ionic Rare Earths, with a project in Uganda. “A lot of governments globally want to be carbon neutral by 2050, and they’re going to need these elements for their offshore wind turbines: if they don’t build up stocks they may have difficulties meeting their needs.”

Harrison believes governments must become more proactive to secure long-term requirements of rare earth elements. “That will require some form of participation or support for the industry – providing incentives to make sure that capacity exists,” he said.

Neodymium, dysprosium, praseodymium, europium, terbium, yttrium and other minerals were labeled “critical rare earth elements” by the US Department of Energy a decade ago, due to their economic importance and potential supply risk.

Originally used primarily in the military, some rare earths have developed numerous applications in magnets in EV engines and wind turbines — now accounting for an estimated 33% of market demand — and propelling prices up.

No substitute has yet been found for critical and heavy rare earths — also known as magnet rare earths — in wind turbine production and in some military vehicles and weapons, Harrison said. According to Vancouver-based Fundamental Research Corp, each EV requires about 10 kg of rare earth elements. Wind turbines are estimated to use up to 408 kg each.

The price of praseodymium neodymium, a rare earth alloy much in demand for electronic equipment, doubled in just over a year to hit around $117,300/mt in August, according to exchange data cited in a Nikkei Asia report.

Rare earth elements made headlines in 2010, when prices skyrocketed as China restricted exports by around 40% for months to preserve more for its burgeoning domestic market, and to cut pollution. This has not been repeated but the need to establish projects and supplies outside China has intensified in recent years as the energy transition has gained pace.

“The Chinese won’t curb exports to the same extent again,” maintains Craig Taylor, CEO of Defense Metals Corp, a TSX-listed Canada-based developer of the Wicheeda light rare earths project near Prince George, British Columbia. Such curbs could encourage development of a stronger rare earths industry in the US, he notes. “Still, China’s own demand is going to occupy all their [rare earths] production through their [growing] EVs production: they have the entire production chain and they are pretty focused.”

Processing in China

Wicheeda, where a prefeasibility study will take place next year, could potentially start up in 4 years’ time, producing around 100,000 mt of rare earths concentrate a year in a $200 million investment, with material sent to China for further processing.

Its open pit project is near MP Materials’ Mountain Pass, currently North America’s sole rare earths producer, and which is mulling the possibility of producing rare earths oxides for magnets production. If this occurs Wicheeda could supply directly to Mountain Pass rather than processing in China: “It’s the kind of supply chain the US government would like to have”, Taylor noted.

Defense Metals Corp, which has applied to be a preferred supplier to the US Department of Defense, is also eyeing a partnership to produce its own oxide, in an investment of up to $800 million, he said.

Only a handful of projects to produce the more critical heavy rare earths are under development outside China: there are also various light rare earths mine projects. Projects of both types at various stages of development include Northern Minerals’ in Australia, Namibia Critical Minerals’ Lofdal, Rainbow Rare Earths’ projects in South Africa and Burundi, Serra Verde in Brazil and Hochschild’s Aclara in Chile.

Ionic’s project at Makuutu, Uganda, is a large project containing all the heavy rare earths. A feasibility study may be completed November 2022, with an initial module projected for 2024 start-up to produce 800–1,000 mt/year of rare earths oxide equivalent in the form of carbonate in a $89 million investment, with all carbonate production to be exported to China, currently the sole location where heavy rare earths refining takes place.

“So although we’d be mining outside China, we wouldn’t be getting away from China’s market dominance,” Harrison said.

That dominance may be hard to shake off, despite the new endeavours. Installation of a refinery could come further down the line as Makuutu builds up its planned five modules, but this would not be in Uganda as it would require advanced infrastructure with chemical parks and access to low-cost reagents, Harrison said.

We hope you have enjoyed the read this week.

Regards,

 

Chris Hagan,