China’s central bank urged to prevent ‘chain reaction’ of debt defaults among local financing vehicles
- An adviser to China’s central bank has warned the government needs to cut risk among local government borrowing platforms
- So-called local-government financing vehicles have long been used by regional governments to raise funds via off-balance-sheet debt
An adviser to China’s central bank urged authorities to take measures to prevent “systemic risks” from the failure of local government borrowing platforms, and warned of a “chain reaction” should defaults be allowed to damage market confidence.
Stronger LGFVs can also seek to go public or acquire listed firms to boost their financing abilities, he said.
The authorities should take steps as soon as possible, due to the risk of “compound” effects among LGFVs, Ma said. A local government investment arm in Inner Mongolia narrowly escaped a bond default this month, ending yet another scare that could have shaken belief in Beijing’s support for such borrowers.
The PBOC adviser’s remarks showed that regulators have realised the “severity” of the woes plaguing weaker, heavily indebted LGFVs, said Xiangjuan Meng, an analyst from Shenwan Hongyuan Securities.
“The proposal of letting LGFVs consolidate across regions is fairly new,” Meng said, adding that there have already been cases of intra-region restructuring of local financing platforms in some provinces.
Regional governments in China have long used LGFVs to raise funds via off-balance-sheet debt. Without formal state backing, Beijing’s shifting attitude over the years has dictated their fortunes: after years of lax oversight, Beijing placed restrictions on debt issuance by LGFVs in 2014 to cut financial risk, only to ease those later as the economy started slowing.
Hohhot Economic & Technological Development Zone Investment Development Group, an LGFV from the less developed Inner Mongolia, caused brief panic in markets earlier this month after missing an early bond repayment. The company secured an extended deadline from investors a few days later.
The incident nonetheless rekindled concerns about the fate of LGFVs, after onshore corporate bond defaults in China rose to a record high this year as a sharp economic slowdown constrains Beijing’s ability to bail out failing borrowers.
A similar incident last year briefly jolted China’s bond market as well. Xinjiang Production Construction 6th Shi State-owned Assets Management, a cotton trader owned by the local government, missed interest and principal on a 500 million yuan (US$71.4 million) note, before making good on the delayed repayment a few days later.
LGFVs have 8.5 trillion yuan (US$1.2 trillion) of notes outstanding onshore and US$69.8 billion in offshore markets, according to data compiled by Bloomberg.