MNI: China Local Debt Plan Needs To Be Supplemented - Advisors
MNI (BEIJING) - Chinese authorities will provide support in coming years to heavily-indebted local government off-balance-sheet financing vehicles to access more credit and equity funding, and to avoid default, as a CNY10 trillion debt swap programme announced last week excluded the vast bulk of their liabilities, policy advisors told MNI.
The plan announced by Minister of Finance Lan Fo’an last Friday will increase the local government debt limit by CNY6 trillion and provide an additional quota of CNY4 trillion for local government special bonds, in a drive to clear CNY14.3 trillion of statutory implicit liabilities, or “hidden debt”, by 2028.
But LGFVs' debt is much higher, and they will need further support from banks to mitigate default risk, including extending loan maturities, lowering interest rates and swapping existing loans, said an advisor familiar with fiscal policy decision making, asking for anonymity.
“The amount of hidden debt recognised by the government is significantly lower than the actual amount,” the advisor said, estimating total LGFV debt could reach as much as CNY60 trillion as of the end of June.
Zhang Yiqun, director at a fiscal studies institute affiliated with Jilin province’s finance department, said defaults on LGFVs' hidden debt are unlikely in the coming years given that Minister Lan has now stated financial support was available to tackle the issue.
“Local governments are likely to help promote restructuring and enhance the vehicle's credit via asset transfers, capital injection or equity increases,” he said.
Xu Lin, chairman of the China-U.S. Green Fund and a former official at the National Development and Reform Commission, said the government would be unwilling to allow LGFVs to default given the risks posed to the economy, while expecting more coordination between the Finance Ministry and the central bank in resolving hidden debt.
PBOC Governor Pan Gongsheng said last week the central bank will promote the reduction in the number of LGFVs and their market-oriented transformation, as the central bank clarified the vehicles exit arrangements.
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The advisor acknowledged that last week’s restructuring measures may have disappointed expectations given only CNY6 trillion could be counted as fresh funds, with the CNY4 trillion local special bonds already ring-fenced for off-balance-sheet refinancing.
But the measures willraise LGFV-related firms’ expectations and profitability, the advisor continued, highlighting that part of the replacement fund would pay off outstanding LGFVs' corporate arrears, which stood at about CNY3 trillion.
Zhang noted the plan would lower the interest rate on local government debt to about 3% from the previous around 5%, and extended maturities would boost local authorities' capacity to increase investment and consumption.
With local governments set to save CNY600 billion in interest payments, losses to banks would be offset by improved asset quality, Zhang added. (See MNI: Beijing's Bank Capitalisations To Lift Tier-1, Lending)
According to LGFVs' mid-year reports in 2024, interest-bearing liabilities had reached CNY64.05 trillion, with bank loans and bonds accounting for 58.9% and 26.2%, an increase of 2.43% and a decline of 0.9% from the previous year.
The reports showed LGFVs' average annualised financing cost in H1 dropped to about 4.8%, down 0.18 percentage points from 2023, due to lenders replacing high-interest debt with cheaper loans.