LGFV Bonds Surging Despite Local Fiscal Risks

Our annual survey of financial conditions at China’s local government financing vehicles (LGFVs) shows a continuing trend of deteriorating cash flows servicing larger debt burdens. Localities themselves are also losing the capacity to provide liquidity support to LGFVs because revenues from taxes and land sales are falling sharply amidst China’s current slowdown, while spending pressure is increasing as Beijing is using fiscal stimulus to boost growth.

But onshore investors are still piling into LGFV bonds, given the scarcity of other implicitly guaranteed assets in the bond market, alongside Beijing’s new interest in shoring up growth with fiscal stimulus. Trading is becoming crowded, in conditions that appear similar to investors’ frenzy for property developers’ bonds before defaults began in earnest. Lower rates are essential to improve the sustainability of local debt conditions.

Posted July 23, 2022
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