![]() The National Development and Reform Commission (NDRC) turned down requests from units with lower credit ratings, said two separate sources with knowledge of the matter, as part of its efforts to stem financial sector risks. Since late 2022, however, authorities have sharpened scrutiny of LGFVs dollar bond issuance. Offshore branches of Chinese financial institutions have been major buyers of the bonds, industry sources said. In recent months, some state-owned banks, asset managers, and insurers have been looking into their portfolios to screen LGFV borrowers with weaker creditworthiness and dispose them, separate financial sector sources told Reuters.įaced with tighter credit criteria at home, LGFVs turned to offshore markets and raised a record $39.5 billion via dollar bonds last year, according to rating agency S&P. The sources, who declined to give details, could not be identified due to the sensitivity of the matter.Ĭhinese banks and other financial institutions have been cautious on new lending to LGFVs over the past years. That priority comes as some Chinese banks with exposure to LGFVs are increasingly getting requests to extend their near-term maturities by as much as six months and reduce interest rates, three sources with knowledge of the matter said. CAUTIOUS LENDERSĬhinese Premier Li Keqiang listed "preventing and defusing local government debt risks" as one of the major tasks for the government in the upcoming year, when he delivered the government report on Sunday as China's two sessions kicked off. "LGFVs are under considerable pressure on debt repayment this year, because their income is often associated with real estate and land sales," said Wang Tao, chief China economist at UBS. The total debt of China's LGFVs has swelled to a recordĦ6 trillion yuan ($9.5 trillion), equivalent to half of the country's economy, from 57 trillion yuan last year, according to an International Monetary Fund (IMF) report last month.Ĭoncerns about their worsening credit profile come as the government is trying to lift the economy from the grip of a property debt crisis in the last couple of years, which saw a number of developers default on their debt and land sale revenues plummet, forcing Beijing to roll out a slew of supportive measures. "I expect many LGFVs to collapse, or to be quietly recapitalized by banks, putting some rural banks and some bondholders at risk of defaults." "They have little or no profit, and cannot pay back their debt owed," he said. They have been used to fill the gap between local government revenue and expenditure," said Andrew Collier managing director at Orient Capital Research. "The LGFVs have become the black hole of the Chinese financial system. So far, they have been no public reports of an LGFV default, but some have had loans extended. The ability of fiscally stretched local governments to follow through on spending will also be a key test for China's modest economic growth target of around 5% this year, as LGFVs play a key role in funding infrastructure projects, one of the biggest growth drivers for the world's second-largest economy. Local Government Financing Vehicles (LGFVs) have 5.5 trillion yuan ($790 billion) worth of onshore bonds coming due this year, the highest since 2021, according to Fitch.įrom mainstay land sales and fewer options for raising fresh funds have fuelled concerns about LGFVs' ability to meet debt obligations and its impact on the broader banking sector and markets. SHANGHAI/HONG KONG, March 10 (Reuters) - China's push to revive the economy this year by increasing infrastructure spending while warding off financial risks is facing headwinds from massive local-government debt, which is more than $9 trillion and growing.Īs debt obligations mount, some local governmentsĪre pushing banks to extend maturities and cut interest rates, sources said.
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