MNI EXCLUSIVE: China To Restrict, Not End, Support For LGFVs

China will continue to help local government financing vehicles through short-term liquidity crunches despite an official statement seemingly withdrawing implicit guarantees for their debt as any dent in the bonds' safety record could have major ramifications for the regional economy, policy advisors told MNI.

The State Council's recent document urging LGFVs to "implement bankruptcy proceedings or liquidation in accordance with the law if they lose their ability to pay" has raised concerns that Beijing's growing tolerance for defaults by state-owned enterprises is starting to extend to these funding platforms as it cracks down on leverage, including implicit debt.

However, advisors believe LGFVs will continue to receive short-term support in indirect ways from regional governments. A major default in their bonds, which have thus far had occasional repayment problems and rank next only to those of the local authority in the domestic credit hierarchy, will shake faith in the financing system, they said.

Local governments "may still help LGFVs through asset injections to improve their balance sheet, or more traditionally by offering subsidies and coordinating negotiations with creditors to extend debt repayments as through installments," said Zhang Yiqun, the director of a fiscal studies institute affiliated with Jilin province's finance department.

DEFAULTS UNLIKELY

Besides funding many infrastructure projects, LGFVs have also taken on low or even non-profit ventures on behalf of the government and their debt has ballooned while fiscal revenues are shrinking.

The Yunnan provincial government recently agreed to help Yunnan Investment Group find a buyer for its stake in a subsidiary as the LGFV faced a liquidity crunch and struggled to repay debt.

More highly rated prefecture-level LGFVs are expected to face such problems. "There is obvious pressure on their cash flow as the financial regulator has strict controls on debt issuance as well as on other non-standard means such as financial leasing, said Yang Xiaoyi, researcher at BRI Data, an investment advisory firm to local governments. Still, defaults in the public debt market are unlikely, especially with issues approved by the National Development and Reform Commission to fund public welfare projects, said Yang.

The total interest-bearing debt of LGFVs was about CNY49 trillion by end-2020, accounting for 48% of GDP, according to the National Institution for Finance & Development. Excluding debt raised for their own commercial activities such as real estate development, local government implicit debt generated by LGFVs accounted for about 30% of GDP, MNI recently reported. Some CNY2.7 trillion of LGFV debt matures this year, according to Yang.

RESPONSIBILITY

Repayment issues are clouded by the difficulty in pinpointing responsibility, advisors said. While local governments take on debt related to projects without any revenue, they tend to exclude that generated by the LGFV's operations, said a researcher with a government-backed think tank who asked for anonymity.

Zhang said LGFVs are set to consolidate through mergers. Currently, each of the 2,800 or so counties nationwide has three LGFVs on average. In some developed provinces, infrastructure requirements are minimal and cannot support that many LGFVs, Yang said, suggesting that contrary to general perception, associated risks may be higher in developed provinces such as Jiangsu. But the government may continue to support LGFVs in some less-developed areas, said Yang.

Another source at a government-backed think tank suggested LGFVs identify and concentrate on high-quality assets and let shell platforms go bankrupt to minimise bond market shocks.