China’s debt-laden local governments struggle to secure refinancing as investors grow wary of default risks

Bond issuance by local government financing vehicles (LGFVs) has slowed amid growing investor concern about defaults

More local governments have been closing poorly-performing LGFVs and consolidating profitable ones, analysts say

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Investors are growing jittery about the risk of default among local governments, which borrowed huge sums for infrastructure projects via local government financing vehicles after the 2008 global financial crisis. Photo: Xinhua

Published: 6:30pm, 24 Jun 2021Updated: 10:15pm, 24 Jun 2021

China’s local governments and state firms are struggling to refinance their debt as investors shun them over a lack of support from Beijing, with bigger defaults likely to take place, analysts say.

Among Chinese state firms, the value of defaults has more than tripled over the past three years and the number of nonpayments more than doubled over the same period, a trend that is set to continue, Standard & Poors Global Ratings said in a report released on Wednesday.

“A trend of bigger individual defaults has more potential to drive investor losses,” said Charles Chang, the Greater China country lead for corporate ratings at S&P.

Investors are also increasingly jittery about the risk of default among local governments for the first time in years, after Beijing signalled there would be no bailouts as it resumed debt reduction this year following Covid-19 stimulus measures that massively expanded debt.

“Post-Covid strain on local government budgets and resources will lead to more selectivity in supporting state-owned enterprises,” said S&P. “This includes local government financing vehicles (LGFVs), which make up nearly half of China‘s corporate bond market.”