China’s weaker LGFVs face default risks as property crisis hurts local authorities’ revenues, analysts warn

Name: China launches mega US$10 billion canal project in a bid to help its economy
Uploaded: 2023-02-18T04:00:22.000Z
Duration: 1 min 52 s
Description: China launches mega US$10 billion canal project in a bid to help its economy

Some 84 per cent of Chinese LGFVs’ US$84.2 billion of offshore debt will mature by 2025, according to China Lianxin Credit Rating

Default risks among weaker local government financing vehicles, which rushed to issue offshore bonds last year, have increased, analysts say

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LGFVs are platforms used by local governments to borrow off-budget capital and facilitate local infrastructure and public projects. Photo: Xinhua

Iris Ouyang

Published: 12:00pm, 18 Feb 2023

China’s weaker local government financing vehicles (LGFVs) are facing higher risks of default and missed payments amid rising financing costs, a wave of maturities and a property crisis that is taking a toll on local authorities’ balance sheets, according to analysts.

This is expected to exert upwards pressure on an already high delinquency rate among high-yield issuers in the Asia-Pacific this year.

One of the two main sectors for offshore bond issuance in China – the other being the beleaguered property industry – could see risk spill over to the broader bond market and threaten systemic financial stability in the world’s second-largest economy, analysts said, although missed payments are more likely to be seen beyond the public bond market in the short run.

“Individual LGFVs’ credit risks, especially in private equity, non-standard debt instruments, and commercial bills have increased to some extent, enhancing the tailwind risk for [other] LGFVs and regions,” said Ben Yau, senior director at China Lianxin Credit Rating Global.

LGFVs are platforms used by the local governments to borrow off-budget capital and facilitate local infrastructure and public projects, which would otherwise be unable to make ends meet.

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China launches mega US$10 billion canal project in a bid to help its economy

Lianxin warned that they will face increasing repayment pressure amid tighter refinancing conditions as the US Federal Reserve expects to continue raising interest rates.

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