A Long Winter for Local Governments

China’s local government financing vehicles (LGFVs) were already under pressure even before the property market’s rapid descent. Maturing LGFV bonds will reach an all-time high in 2022, with 1.7 trillion yuan in bonds ($267 billion) maturing in the next six months, through the end of May. Against this backdrop, localities’ implicit financing channels are being restricted and more importantly, income from land sales is declining sharply. Beijing’s chosen option to maintain stability within the property sector—helping developers to finish the construction of houses—only adds to localities’ financial burdens.

With risk in the property sector rising, onshore investors have actually increased their exposure to LGFV bonds, seeking the security of government guarantees. Crowded trading could amplify risks if and when the first LGFV default occurs and investors rush to the exits. Beijing sees the rising risks, and has been boosting issuance of refinancing bonds to help localities manage debt pressures.

Posted November 18, 2021
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