Guizhou makes a move to ease debt issues

Guizhou and its debt-ridden government looks into increasing its controlling stake in iconic liquor giant Kweichow Moutai Co. Ltd.

Guizhou has not benefited substantially from the Chinese economic reform as compared to other Chinese provinces. Although considered a relatively poor and economically undeveloped province, Guizhou is rich in natural, cultural and environmental resources.

Moreover, it is considered a relatively poor and economically undeveloped province, with the third-lowest GDP per capita in China, ahead of Gansu neighboring Yunnan. However, it is also one of China’s fastest-growing economies.The Chinese government is looking to develop Guizhou as a data hub.

Guizhou, with a population of 36 million people, had a 2018 gross domestic product (GDP) of 1.48 trillion yuan.

According to a Kweichow Moutai file, Kweichow Moutai Group plans to give its 61.99% stake to a provincial government-backed investment entity. The US$8.1 billion transfer is intended to address market concerns about Guizhou’s debt risks.

4% of Kweichow Moutai’s equity is equivalent to the 50.24 million shares transacted. It traded at 1,135.1 yuan a share at Thursday’s close, making it the most valuable mainland listing with a market capitalization of 1.43 trillion yuan.

The approach Kweichow Moutai had in mind clearly shows how local Chinese governments could utilize their state-owned assets to resolve debt issues. It is likely that other local authorities would follow Guizhou in the future.

After the transaction, Moutai Group will hold 58% of Kweichow Moutai.

Amidst Guizhou’s financial condition, facing debt repayment pressures and rising market concerns the deal transpired.

According to Everbright Securities, Guizhou provincial government had 885 billion yuan outstanding debt at the end of 2018. It is one of numerous localities that have experienced rising corporate bond defaults this year.

In hopes of restoring investor confidence, Guizhou Vice Governor Tan Jiong met with bond investors in October at the Shanghai Stock Exchange and pledged supportive policies to ensure repayment.

However, it was evident that the market was still holding back despite official backing up. It was awaiting concrete measures that could provide new funding to improve the province’s capital condition as expressed by Tianfeng Securities.

In a research note, Pacific Securities said that the state transfer from Moutai Group will help ease the market concerns.The Guizhou government’s total holdings in Kweichow Moutai are worth more than 900 billion yuan. It could be used to back government debt and bonds issued by government financing vehicles, Pacific Securities added

While the stake transfer would strengthen market confidence, it will take time to assess how it will affect trading of bonds linked to Guizhou as its impact hasn’t shown yet on the secondary market.

Analysts see that rather than using the Kweichow Moutai stake as collateral for fundraising, it is more likely to use Guizhou State-Owned Capital Management as a main funding platform in the future. Thus, it was also a symbolic move to the provincial government’s capacity.