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.
“目前高校化解债务的方法主要有四种。第一种,地方政府出面,直接拨款给予补贴,或给予政策扶持,或牵头协调各方;第二种,以土地置换获取收益偿还贷款,这是当前中国贷款高校最普遍的做法之一,尤其是一些贷款额度较高的省份,如江苏、河南、辽宁、浙江、江西等,更是出现了全省性的土地置换风潮;第三种,以银团贷款的方式进行债务重组,江苏、河南、山东等省的高校开始与银行合作,积极探索以银团贷款方式进行债务重组的新路子,以降低高校和银行双方的风险;第四种,调整贷款结构,变短期贷款为长期贷款,变商业性贷款为政策性贷款,辽宁省与湖北省就将各自省属高校总额分别为73亿元和81亿元的短期贷款打包置换成国家开发银行的长期贷款。”
[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.