China’s LGFV Insiders Say $9 Trillion Debt Problem Is Worsening
At the center of this dilemma are local government financing vehicles, companies set up across China to borrow on behalf of provinces and cities but not explicitly in their name. Xi’s government has sought to turn these firms into profitable businesses so they’d no longer need government money to pay the interest on their debts.
But interviews with employees at six such firms in separate provinces suggest the effort isn’t working in poorer inland regions.
Several companies haven’t been able to generate enough income to pay interest on loans. Banks are unwilling to lend, investors are shunning their bonds, bonuses are being cut and it’s becoming harder to find viable investment projects, the employees said, asking not to be identified due to the sensitivity of discussing government finances publicly.
If the central government avoids a bailout, the burden of repayment will fall increasingly on local governments or on banks tasked with lowering interest rates and extending maturities on the debt. Both options will limit the capacity of local governments and banks to support economic growth.
It’s a worry for investors, as well, since any default on LGFVs $2 trillion of bonds — which account for nearly half the country’s onshore corporate debt market — would destabilize China’s $60 trillion financial system, producing global shockwaves.
“The most important variable impacting China’s economic growth over the next two years will be the success or failure of local government debt restructuring,” said Logan Wright, director of China markets research at Rhodium Group. “A collapse in local government investment would be comparable to the economic impact of the crisis in the property market.”