Despite monetary easing and an emerging recovery, Beijing will struggle to manage the financial stress produced by local government debt this year. LGFV bonds have regained investors’ trust and have been bid heavily early in 2019, but our analysis of financial statements from 2,489 LGFVs indicate that their aggregate debt—estimated from 41.2 to 51.7 trillion yuan ($6.1-7.6 trillion)—remains a key threat to local fiscal sustainability and a headwind to current cyclical momentum. Beijing will need to reduce interest rates to give localities time to raise revenue and pay down liabilities. Even if a substantial proportion of debt is refinanced, further defaults are inevitable and LGFV debt will continue to drag down growth in the coming years.
