Explainer | Is China’s local government debt a concern and what role do LGFVs play in infrastructure spending?
- Local government bonds reached 28.6 trillion yuan (US$4.5 trillion) at the end of September, accounting for 23 per cent of the all the listed bonds in China by volume
- Local government hidden debts, mainly LGFV debts including loans and bonds, reached 45 trillion yuan (US$7 trillion) at the end of 2020, according to estimates
Local government debt in China is broken down into two parts, namely explicit and implicit debt.
What are LGFVs?
Bonds sold by local government financing vehicles, or LGFVs, are one of the ways provincial authorities raise money to increase spending without including it on their official balance sheets.
LGFVs flourished following the 2008 global financial crisis as a way of funding China’s infrastructure building spree, even if they did not generate returns.
The debt raised is kept off the balance sheets of local authorities, yet carries an implicit government guarantee of repayment.
Why is local government debt a concern in China?
Implicit local government debt, which the central government often refers as so-called hidden debt, is seen as the biggest concern as there is no official data on the total debt sold by LGFVs, making it difficult to monitor.