Credit Risk Shifts to LGFVs

Local government financing vehicles (LGFVs) have been central to the credit-intensive growth model China has followed since 2009, but new regulations have restricted local government support for these entities this year. Though a recent relaxation of funding conditions signaled by the State Council may stabilize infrastructure investment and improve LGFV access to financing at the margin, the headwinds facing local government-linked firms are significant.

Outstanding LGFV debt levels are over twice as large as government data would imply, based on a comprehensive examination of public records of bond filings. Interest payments on LGFV debt consume significant proportions of some provinces’ overall new credit. We expect the first-ever LGFV bond defaults to emerge soon, which could test market expectations of government support in many other asset classes as well. How Beijing manages this stress will be a crucible for commitments to financial reform and the deleveraging campaign.

Posted August 18, 2018
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