China debt: local government default risk grows as authorities struggle to repay credit

Debt owned by local government financing entities has increased substantially this year as regions borrow money to offset the economic impact of the coronavirus

But strained fiscal conditions among local governments have raised questions about their ability to repay years of cheap credit, much of which matures next year

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The coronavirus has further strained fiscal conditions for local governments struggling with debt. Photo: EPA-EFE

Published: 12:00am, 11 Dec 2020Updated: 4:19am, 11 Dec 2020

China’s regional economies are under growing pressure to meet debt repayments after a years-long spending spree, as trillions of yuan worth of credit is set to mature next year, according to analysts.

A series of recent defaults by state firms that count local governments as majority shareholders have raised doubts over the ability of some authorities to pay back debt, including off-balance sheet borrowing through so-called local government financing vehicles (LGFVs). The risk of default has stoked fears about damage to the wider economy.

Local government debt in the world’s second biggest economy ballooned this year after Beijing raised its fiscal budget deficit level and local government debt quota for infrastructure investment funding to steady the coronavirus-hit economy. LGFVs are often the main funding platforms for regional infrastructure projects.

The outstanding bond balance reported by LGFVs grew by more than 10 per cent in the third quarter this year, even amid a slowdown among other companies, highlighting “local government’s determination to strengthen fiscal-like support to stimulate the real economy”, according to a report by French bank Natixis published last month.

Moody’s Investors Service, which tracks local government debt in China, said in a report released this week it maintained a “negative outlook” for local and regional government debt for 2021, as China’s economic recovery was uneven across the country.

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