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

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China’s central bank has been warned to clean up debt risk among so-called local-government financing vehicles. Photo: Reuters

Published: 1:30pm, 18 Dec 2019Updated: 10:18pm, 18 Dec 2019

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.

Ma Jun, an external adviser to the People’s Bank of China (PBOC) monetary policy committee, said in an interview with Securities Times published on Wednesday that the government could allow so-called local-government financing vehicles (LGFVs) with strong fundamentals to take over weaker counterparts including those in other provinces.

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.

Ma’s comments come as market participants are debating whether China’s leadership is easing up on its multi-year deleveraging drive amid a slowing economy. Last week’s Central Economic Work Conference, a key meeting to plan next year’s policy moves, seemed to play down the urgency to clean up the financial system. However, Ma argued that necessary government intervention is still needed to prevent “systemic financial risks,” and local governments should also take on some responsibility to come up with measures to address hidden debts.

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.