China’s local governments step up plans to issue refinancing bonds to tackle LGFV debt
- Provincial and municipal governments are issuing refinancing bonds to service outstanding liabilities associated with US$9 trillion of ‘hidden’ debt
- At least six local governments said they plan to issue refinancing bonds totalling some 320 billion yuan to swap the off-balance sheet debt concentrated in LGFVs
China’s local governments are gearing up to issue refinancing bonds to service outstanding liabilities associated with US$9 trillion of “hidden” debt amid efforts by Beijing to defuse risks in its slowing economy.
So far this week, at least six local governments – Inner Mongolia, Tianjin, Liaoning, Chongqing, Yunnan and Guangxi – have announced plans to issue refinancing bonds totalling some 320 billion yuan to swap the off-balance-sheet debt concentrated in local government financing vehicles (LGFVs), used mainly to fund infrastructure and social welfare projects.
Authorities in the northeastern province of Liaoning said they would issue refinancing bonds totalling 87 billion yuan on Thursday to repay outstanding debt. Yunnan, Guangxi, Chongqing and Tianjin said they would also issue bonds under the same category worth 53.3 billion yuan, 49.8 billion yuan, 42.2 billion yuan and 21 billion yuan, respectively, according to local media. The autonomous region of Inner Mongolia issued 66.3 billion yuan of bonds on Monday.
“[As] local governments have taken a big hit on their revenues due to a slumping property market, the refinancing bonds will provide a short-term solution to cover old debt nearing maturity,” said Kenny Ng, a securities strategist at Everbright Securities International. “This will help local governments relieve their debt burden and boost investor confidence in LGFVs.”
LGFVs were set up by local governments to issue bonds and invest in infrastructure projects to help boost the local economies. Since the projects are expensive and require a long time to complete, the financing vehicles have not been able to generate enough returns to cover their obligations. With local governments facing increasing cash-flow problems because of the crisis in the property sector, the “hidden” debt has ballooned to US$9 trillion and with it the risk of LGFV defaults.
The move to issue refinancing bonds came after China’s leadership at the July Politburo meeting pledged to formulate “a basket of plans” to resolve risks stemming from local government debt. The planned refinancing bonds are estimated to be worth 1.5 trillion yuan this time around, according to local media.
As early as 2020, China had introduced special bonds for refinancing purposes to help municipal governments reduce their off-balance-sheet liabilities. It is estimated nearly 1.2 trillion yuan of such bonds have been issued in the three years to 2022, according to local media.
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State-run Securities Times said on September 27 that a “good window of opportunity” has opened up to resolve the debt issues as local governments are nearing the end of the current cycle of issuing new special bonds. It also noted that China’s central bank has implemented a slew of measures, including a cut to banks’ reserve ratio, to boost liquidity and support the country’s economic recovery.
However, analysts have raised doubts about the impact of the refinancing bonds, noting the amount is rather small compared with borrowings of 66 trillion yuan by LGFVs as estimated by the International Monetary Fund.
“Compared with [Beijing’s] monetary policy, its fiscal policy seems to be too conservative,” said Kenny Wen, head of investment strategy at KGI Asia, a Hong Kong-based wealth management firm.
“A lack of confidence and concern over the property market continue to weigh on the economy. We think more measures need to be taken, including further reduction to the loan prime rates and reserve requirement ratio.”
