Bonds issued by China’s local government financing vehicles (LGFVs) were once a top choice for investors because of high yields and low default risks, along with implicit government guarantees. However, as Beijing’s new round of tightening targeting local government debt has eroded localities’ support for LGFVs, the credit risk profiles of the bonds appear similar to other corporates, while default risks are rising given weakening operating cash flows and higher funding costs.
