(Yicai) Nov. 22 -- A county in a southwestern province in China plans to redeem 70 percent of its outstanding debt principal based on an initial repayment scheme proposed by a local government financing vehicle, according to an investor in a local project.

The county received funds raised through special refinancing bonds recently, the investor told Yicai. Half of the debt repayment will be made in cash and the other half in undisclosed physical assets, the person said.

There have been a number of cases recently where LGFVs made discounted repayments after more than 20 provincial-level regions issued over CNY1.2 trillion (USD169 billion) of special refinancing bonds to ease local government debt risks. The funds are going to cities and counties to pay down eligible hidden debt.

Hidden debt is not transparently disclosed or accounted for in local government balance sheets and is mainly concentrated in LGFVs, entities set up by local authorities to facilitate financing for infrastructure and development projects.

Yicai reported on Nov. 20 that a trust issued by a state-owned asset investment company in Zunyi, Guizhou province that matured two and a half years ago and is in default will pay back 70 percent of the CNY450 million (USD63.6 million) principal to investors to help ease the province's hidden borrowing.

The scheme to pay off debt at a 30 percent discount resulted from the final negotiations between the trust company and the LGFV, Yuan Quanquan, a senior research and development director at credit ratings agency CSCI Pengyuan, told Yicai. This shows that local financial conditions are tight, and they do not have enough money to pay off debts in full, Yuan added.

It is up to investors to decide whether they are willing to incur some losses now to recover most of the principal or are willing to give up this opportunity and continue negotiating, hoping to recover the lot eventually, Yuan said.

The repayment of hidden debts by LGFVs at a discount is a commercial behavior between firms and financial institutions, Wen Laicheng, a professor at the Central University of Finance and Economics, told Yicai. It works as long as the parties reach an agreement via consultation based on equality, Wen said.

Discounted repayments will harm the LGFVs, according to Wen, as investors will look at their track records when assessing whether or not to lend to them in the future. 

Investors will take on high risk if they buy trust products with high returns, according to experts in local government debt. Some investors are willing to bear losses to recover part of the principal sooner, so discounts may be imitated by other regions, becoming a commonplace, they added.

The debt burden in some regions has swallowed up economic growth, causing them to struggle to repay the principal and interest on borrowings, said Hu Hengsong, deputy general manager at Caida Securities. Local economic development will be affected further if no debt resolution is carried out, he said.

Editors: Liao Shumin, Martin Kadiev