Thursday, July 2, 2015

Chinese Universities, the Other Local Government Financing Vehicle.

In March 2007, Jilin University, located in the north-eastern province of the same name, posted a notice on its website soliciting recommendations to resolve its debt problem. After accumulating three billion yuan of debt to build facilities to enroll 60,000 students, Jilin University was having difficulty paying up to ¥170 million in interest payments every year. The issue of university debt, and debt guarantees, became a topic of public discussion throughout 2007. Although discussion of the topic has largely disappeared, the debt has not.

During debate on this issue, very authoritative sources on the subject could not agree on the total value of debt owed by Chinese universities. People's Daily reported that total debt of public institutions of higher education had reached ¥200 billion yuan. The Economic Observer cited a People's Political Consultative Conference survey that put the number at ¥250 billion. The National People's Congress cited the 2006 Blue Book of China's Education to claim that debt levels had reached ¥500 billion. Clearly, one or two of these institutions do not understand the Chinese economy.

Any discussion on cash flow problems will have to answer the question of whether it is a spending problem or a revenue problem. According to Qifeng Zhou, the former president of Jilin University, it is a revenue problem. He was quoted as saying, "Universities have no reason to pay back their debts[.] ... The major reason for the huge debt is that the government has not invested enough in higher education[.] But public colleges are owned by the government, so the debt belongs to the government as well."

The Chinese Academy of Social Sciences Review published an article in 2009 on the university debt crisis. It explained the four ways that universities were addressing the problem.
[Translation: "Currently, there are four main options universities can use to resolve their debt problems. First, local governments can directly pay subsidies, provide policy support, or lead multi-party coordination. Second, income from land exchanges can be used to repay debts. This is the most popular method used by indebted universities, especially in provinces like Jiangsu, Henan, Liaoning, Zhejiang, Jiangxi, etc., where debt levels are high. Third, debt can be restructured with syndicated loans. Universities in Jiangsu, Henan, Shandong, and other provinces have begun to cooperate with banks to actively explore new ways to reduce risks for both universities and banks by syndicating debt. Fourth, structural adjustments can be made to loans. Short-term debt can be converted into long-term debt and commercial loans can be converted into policy loans. In Liaoning and Hubei, with ¥7.3 billion and ¥8.1 billion worth of university debt, respectively, short-term debt has been repackaged into long-term debt from the National Development Bank."]
None of these options actually resolved the debt problem. Subsidies and policy support simply shifted the burden to taxpayers. Income from land exchanges only lasts so long. Syndicated debt is still risky debt if the original principle cannot be repaid. Policy loans simply shift the burden to policy bank balance sheets.

There were three options that would have actually resolved the debt problem. The first is bankruptcy. Many of the lenders to universities made lending decisions unrelated to the financial payback of the university's investments in campus construction. This would have cleared most of the debt, but caused problems for universities later on when they returned to the capital market for future lending. The second is asset sales. Many universities had huge tracks of valuable land granted to them or made redundant as institutions of higher education were merged together. This would have only reduced the overall debt load, it would not have resolved cash flow issues. Third, the universities could have been privatized. China currently does not have one single nationally-ranked private university. Many foreign educational institutions would have paid dearly to have the opportunity to obtain a license to run a fully private university in China. A private university would also be able to determine tuition rates on its own. This would bring tuition rates up to a level that would offset the university's expenses. China's overall quality of higher education would have improved due to increased competition. Unfortunately, bankruptcy or privatization were never pursued. Instead, the debt was simply extended into the future, plus interest.

Considering the lack of focus on the issue, a university bankruptcy has not been priced into the capital markets. The social implications of tens of thousands of students either having tuition increased substantially or not being able to graduate would cause risks beyond the financial markets.