Shanghai, Guangdong debt pilot programmes aim to reduce China’s hidden local government liabilities
- Shanghai and Guangdong will focus on better self-regulation to curb hidden debt risks, while also looking to convert some of the debt into regonisable debt
- Debt issued by local government financing vehicles (LGFVs) have long been a major concern for the central government
Two of China’s wealthiest regions have set up pilot programmes aimed at eliminating so-called hidden local government debt, but questions have been raised over how much can be done amid rising risks that Beijing may be forced to step in and bail out authorities.
Last month, the financial city of Shanghai and the southern manufacturing powerhouse province of Guangdong signalled local governments are keen to tackle their mounting debt by launching trials to clean up off-budget lending.
LGFV debt, which is made up of bank loans and bonds, could pose a contagion risk to the country’s state-dominated banking system as many lenders have significant exposure to local government debt but public data on the size of the debt owed is not available.
“There is always a deliberate ambiguity involved, on both sides,” said Logan Wright, director at Rhodium Group, who leads the firm‘s research on China.