China’s debt clamp down stokes risk of first local government credit defaults
- Beijing signalled last month it may allow local government financing vehicles (LGFVs) to default or undergo restructuring if they are unable to repay debt
- Since then, there have been signs that some LGFVs have been slowing the issuance of new debt because of tougher requirements from stock exchanges
The risk of a wave of defaults among China’s heavily indebted local government financing vehicles (LGFVs) for the first time is causing jitters in financial markets after Beijing signalled early this year there would be no bailouts.
Beijing’s renewed emphasis on deleveraging comes after stimulus efforts to fight the economic impact of the coronavirus pandemic caused debt levels to reach record highs, and there are already signs of strain.
Defaults of Chinese onshore bonds reached 60.84 billion yuan in the first quarter, up 18.3 per cent compared to 51.42 billion yuan over the same period last year, according to the National Institution for Finance & Development.
Since LGFV bonds have never defaulted before, it could cause market jitters if it happens for the first time
Larry Hu, chief China economist at Macquarie Group, said because this year’s growth target was not binding, policymakers were eager to break the implicit government guarantees that had prevented struggling financial entities from failing in the past.