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Are China’s LGFVs the next shoe to drop?

Chinese investors are buying bonds issued by local government financing vehicles as fast as they’re printed – due to a cratered property sector, a lack of other buying options and a perception it’s a safe asset class. But analysts warn LGFV defaults are imminent and could result in a wave of credit events.

Photo: iStock

China’s local government financing vehicles (LGFVs) are a baffling construct. They emerged in the wake of the global financial crisis, as Beijing sought ways to inject life into provincial cities.

In other countries, these off-budget organizations, which help local officials raise money to splash out on big projects – usually infrastructure – would by now have been wound up.

But China is not built that way.

They hung around, growing ever-more bloated with debt. At the end of 2021, total LGFV debt was Rmb54.4 trillion ($7.82 trillion), reckons data provider Wind, more than double the level of six years ago. They have Rmb4.5 trillion in outstanding debt due in the year to the end of June 2023, or 46% of all maturing debt issued by domestic non-financial firms.

Most, to put it kindly, aren’t in great shape. Moody’s analysts said on August 24 it would take “several years” for LGFVs to get to the point where “self-generated cash flow can service their debt”. In a survey published on July 22, Rhodium Group pointed to a “sharp rise in debt” alongside “deteriorating cash flows to service those debts” – all set against a backdrop of falling tax revenues and land sales, exacerbated by a sluggish economy.

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