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China\u2019s push to revive the economy this year by increasing infrastructure spending while warding off financial risks is facing headwinds from massive local-government debt, which is more than $9 trillion and growing.<\/p>\n
As debt obligations mount, some local governments are pushing banks to extend maturities and cut interest rates, sources said. Local Government Financing Vehicles (LGFVs) have 5.5 trillion yuan ($790 billion) worth of onshore bonds coming due this year, the highest since 2021, according to Fitch.<\/p>\n
A sharp drop in income from mainstay land sales and fewer options for raising fresh funds have fuelled concerns about LGFVs\u2019 ability to meet debt obligations and its impact on the broader banking sector and markets.<\/p>\n
The ability of fiscally stretched local governments to follow through on spending will also be a key test for China\u2019s modest economic growth target of around 5% this year, as LGFVs play a key role in funding infrastructure projects, one of the biggest growth drivers for the world\u2019s second-largest economy.<\/p>\n
So far, they have been no public reports of an LGFV default, but some have had loans extended.<\/p>\n
\u201cThe LGFVs have become the black hole of the Chinese financial system. They have been used to fill the gap between local government revenue and expenditure,\u201d said Andrew Collier managing director at Orient Capital Research.<\/p>\n
\u201cThey have little or no profit, and cannot pay back their debt owed,\u201d he said. \u201cI expect many LGFVs to collapse, or to be quietly recapitalized by banks, putting some rural banks and some bondholders at risk of defaults.\u201d<\/p>\n
The total debt of China\u2019s LGFVs has swelled to a record 66 trillion yuan ($9.5 trillion), equivalent to half of the country\u2019s economy, from 57 trillion yuan last year, according to an International Monetary Fund (IMF) report last month.<\/p>\n
Concerns about their worsening credit profile come as the government is trying to lift the economy from the grip of a property debt crisis in the last couple of years, which saw a number of developers default on their debt and land sale revenues plummet, forcing Beijing to roll out a slew of supportive measures.<\/p>\n
\u201cLGFVs are under considerable pressure on debt repayment this year, because their income is often associated with real estate and land sales,\u201d said Wang Tao, chief China economist at UBS.<\/p>\n
CAUTIOUS LENDERS<\/strong> That priority comes as some Chinese banks with exposure to LGFVs are increasingly getting requests to extend their near-term maturities by as much as six months and reduce interest rates, three sources with knowledge of the matter said.<\/p>\n The sources, who declined to give details, could not be identified due to the sensitivity of the matter.<\/p>\n Chinese banks and other financial institutions have been cautious on new lending to LGFVs over the past years.<\/p>\n In recent months, some state-owned banks, asset managers, and insurers have been looking into their portfolios to screen LGFV borrowers with weaker creditworthiness and dispose them, separate financial sector sources told Reuters.<\/p>\n Faced with tighter credit criteria at home, LGFVs turned to offshore markets and raised a record $39.5 billion via dollar bonds last year, according to rating agency S&P. Offshore branches of Chinese financial institutions have been major buyers of the bonds, industry sources said.<\/p>\n Since late 2022, however, authorities have sharpened scrutiny of LGFVs dollar bond issuance. The National Development and Reform Commission (NDRC) turned down requests from units with lower credit ratings, said two separate sources with knowledge of the matter, as part of its efforts to stem financial sector risks.<\/p>\n The NDRC and the China Banking and Insurance Regulatory Commission didn\u2019t immediately respond to requests for comment.<\/p>\n \u2018WAIT AND WAIT\u2019<\/strong> The worsening outlook for LGFVs has also made some shadow banks \u2014 lenders for sectors that are unable to tap bank funding directly \u2014 worried about their exposure to such units and averse to fresh lending.<\/p>\n \u201cIt seems clear to me that a number of projects may default with consequences for bondholders, specially offshore ones.\u201d<\/p>\n Some analysts believe that Chinese authorities would avoid large scale of defaults by LGFVs as that would make debt market access tougher for both public and private issuers at a time when efforts are being made to revive the economy after the dismantling of three years of tough COVID-19 measures.<\/p>\n \u201cLGFV debt itself as a share of GDP is still manageable at this stage. The key issue is to stop the fast growth and avoid default to trigger panic in the market,\u201d said Zhiwei Zhang, chief economist at Pinpoint Asset Management. China\u2019s push to revive the economy this year by increasing infrastructure spending while warding off […]<\/p>\n","protected":false},"author":23,"featured_media":219975,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[297],"tags":[],"class_list":["post-219977","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy-english"],"yoast_head":"\n
Chinese Premier Li Keqiang listed \u201cpreventing and defusing local government debt risks\u201d as one of the major tasks for the government in the upcoming year, when he delivered the government report on Sunday as China\u2019s two sessions kicked off.<\/p>\n
A deterioration in capital-market access can increase refinancing risk and deepen the liquidity crunch for the LGFV sector, Fitch Ratings said in a report last month, adding units in less economically developed regions are more at risk.<\/p>\n
Source: Reuters (Reporting by Engen Tham, Xie Yu and Ziyi Tang; Editing by Sumeet Chatterjee and Kim Coghill)<\/p>\n","protected":false},"excerpt":{"rendered":"