Local government financing vehicles struggling to repay loans
The mainland’s plan to run its biggest fiscal deficit since the global financial crisis may help develop its bond market, but the extra competition for funding could sink some of the major providers of local government financing.
Local government financing vehicles (LGFVs), which were invented to skirt restrictions on local government fundraising, are already under pressure from Beijing’s drive to reduce local debt and migrate provincial financing to a more transparent municipal bond model.
With more than US$3 trillion in outstanding debt that funded essential infrastructure, along with some vanity projects and speculative adventures, LGFVs are finding it hard to service their existing debts, let alone raise new money when loans fall due.
If financing remains this tight, some companies will die
Some fear they could go under.
“There is no way we can survive, and the pressure on the company is huge,” an executive at an LGFV in Yangzhou, Jiangsu, said.
His company has several billion yuan in debt raised to build roads and lay pipes.
“Our loans are due, and we can’t repay them,” he said. “If financing remains this tight, some companies will die.”
To service the mainland’s 1.12 trillion yuan (HK$1.38 trillion) deficit for 2015, up 170 billion yuan from last year, state borrowers will also turn to the bond markets, competing for cash with LGFVs just as investors grow wary that the vehicles no longer enjoy the tacit government guarantees they enjoyed in the past.