We conducted a detailed survey of the 2020 financial results of 2,760 local government financing vehicles (LGFVs). The details show dramatic reductions in operating profit and returns on assets, as well as these firms’ increasing reliance on subsidies and debt growth to maintain financial health. This year, rising credit market pressures and policy changes from Beijing reducing funding options are amplifying LGFVs’ financial stress. Local governments themselves want to support their financing platform companies, but many lack the capacity and resources to do so. As a result, LGFV defaults within domestic markets are inevitable. The key questions are when implicit guarantees on these firms will break, and how financial markets will react to the fallout.
