BACHY Bank of China Ltd (PK)

By James T. Areddy 

WENLING, China--Campaigning on plans to rebuild American infrastructure, Donald Trump has invoked China: "They have bridges that are so incredible," he told a South Carolina audience this year. "They have railroad trains that go 350 miles an hour."

But the engineering that helps the country maintain its reputation as the world's superbuilder is now increasingly financial.

The 400-foot JinQing Harbor Bridge under construction in this small seaside city is being financed not by bank loans or bonds but by a Chinese twist on the public-private partnerships that the president-elect has proposed to fund infrastructure projects in the U.S.

The city, like many in China, faces budget constraints after years of expansion amid warnings from central authorities that debt is already too high. So to pay for the $1.2 billion highway project that includes the new bridge, Wenling's government teamed up with Bank of China Ltd. to create an "industrial fund" that pulls in money from ordinary investors.

Ultimately, the city is on the hook to pay back the money with a preset return. Critics of the structure say it is merely a way of disguising debt to pile more obligations on already straining government entities. Meanwhile, individual investors risk losing their savings if the deals go bad.

Xie Meiping, the roadway project's finance chief, said Bank of China conceived of the financing deal to address tight finances in Wenling. She played down risks and said the arrangement benefits everyone by supporting the construction company and getting the work done.

"The nation is investing a small amount of money, while society is providing most," Ms. Xie said.

Bank of China declined to comment.

Industrial funds, known as chanye jijin in Chinese, are a legal and popular workaround in a country that is simultaneously addicted to boosting growth through infrastructure spending but also worried that money is being squandered on needless projects.

Hundreds of industrial funds have been launched. They back new renewable-energy projects in Guangdong, a port expansion in Shanghai, a high-technology manufacturing push in Hubei province, and a $45 billion effort to construct housing, wastewater treatment and elder-care facilities in Henan.

"We're seeing continued proliferation of off-balance-sheet channels to help banks extend and mask credit," said Jack Yuan, a Shanghai-based analyst at Fitch Ratings. "Much of this is going to infrastructure and other local government projects, sometimes in the guise of funding for public-private partnerships."

To establish Wenling's industrial fund late last year, the local government contributed roughly 20% of the $190 million in seed capital, while Bank of China put in the rest. The fund then took control of two city-run builders--longtime borrowers of the bank that had contracts to build three local highways including the bridge. Since then, the bank has advertised a series of wealth-management products online that promise an annualized return of around 4% for a 91-day investment in preferred shares issued by the fund.

The Bank of China Wenling City Development Fund has a six-year lifespan, after which the city government is obliged to buy out the bank's investment, plus an annualized 8.5% return.

Those terms make the deal look more like a loan to the city, but don't answer where funds for repayment will be found. They also show how, in China, the difference between public and private often isn't clear.

"There is a division; it's just blurred," said Craig Sugden, a private-public-partnership specialist in Manila at the Asian Development Bank. "The government is on both sides of the partnership."

It is unclear how much industrial funds have added to the country's growing pile of debt. The practice compounds widely recognized risks related to corporate and local government borrowing, which together account for about three-quarters of the nation's total, and the use of wealth-management products to keep the debt off official balance sheets.

Throughout China, cities racked up debt so fast building infrastructure that the central government in 2004 banned them from direct borrowing and then in 2014 forbid certain indirect borrowing, actions that gave rise to the industrial-fund trend.

Wenling, which long specialized in shoemaking, has gussied itself up by making its seashore and a hillside of rock formations visible from Ms. Xie's office more accessible to tourists. It is already served by a regional airport, and bullet trains stop in town.

A six-lane elevated coastal highway with its own harbor bridge opened two years ago--just a few miles to the west of the one now under construction.

Shen Lei, a deputy finance department chief for Zhejiang province, where Wenling is located, last month explained the wisdom of attracting private money into public works. He cited a Chinese proverb that translates roughly as "using four ounces to move a thousand pounds."

Junya Qian contributed to this article.

Write to James T. Areddy at james.areddy@wsj.com

(END) Dow Jones Newswires

December 06, 2016 07:14 ET (12:14 GMT)

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