City-Level Financial Stress Rising

Local-level credit events in China are piling up, and evidence of broader stress across China’s financial system is accumulating. The ultimate cause is the contraction in shadow banking under the deleveraging campaign, as the informal financial system had previously kept highly indebted local governments afloat. The bill for the post-crisis credit expansion is now coming due, and recent defaults by some of Tianjin’s larger state-owned firms will not be the last credit events from China’s local governments.

In this note we take an in-depth look at city-level financial data, using disclosures from local government financing vehicle (LGFV) bond prospectus documents and city-level fiscal data. The analysis yields a large number of cities facing similar levels of pressure to Tianjin, particularly in China’s northeastern and southwestern regions. These credit events will limit the effectiveness of counter-cyclical stimulus measures in the coming years and will force Beijing to consider more aggressive options to clean up local debt.

Posted December 10, 2019
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