Therefore, the local governments of the above provinces are facing the risk of being unable to repay, including loans through LGFV channel. LGFV is often the main funding platform for regional infrastructure projects.
Local government debt in the world’s second-largest economy soared this year after Beijing raised its fiscal deficit and local government debt quota for infrastructure investment to stabilize. of the economy affected by the Covid-19 pandemic.
According to a report from French bank Natixis, the outstanding outstanding bonds of LGFVs increased by more than 10% in the third quarter. "This shows that the authorities at all levels are determined to take fiscal measures to stimulate the economy," according to Natixis.
New loans "compensate" old debts
Moody’s Investors Service assesses China’s local and regional public debt outlook in 2021, said not much "positive" by the Chinese economy’s uneven recovery in different regions after the Covid pandemic. -19.
According to Moody’s analyst Yubin Fu, China’s tax cuts in response to the effects of the Covid-19 pandemic of China have left many localities in financial trouble. Some localities have even been forced to increase their debt through private enterprises and LGFV.
Former Chinese Deputy Finance Minister - Mr. Zhang Hongli said that during the first 10 months of 2020, more than 60% of local governments of provinces and cities borrowed new loans to repay old debts. This shows that most localities do not generate cash flows large enough to be able to cover their debts.
Citing JPMorgan’s statistics report, in the first half of this year alone, the debt through LGFV increased by 3,700 billion yuan ($ 565.9 billion), a large amount exceeding 3,300 billion yuan ($ 504 billion) in 2019. Analysts, Chinese localities rarely default because of loans through LGFV, however, the risk is heightened as tax revenues and land sales plummet due to the newly enacted policy.
According to Fitch Ratings, a wave of defaults in localities in China may explode once the time for payment of LGFV’s bonds has arrived. Compared to 2020, LGFV bond debt maturing next year will be 21% higher.
In November, the energy company owned by Henan province - Yongcheng Coal & Power - was unable to repay its bond debt. Right after that, a series of defaults of state-owned enterprises were uncovered, making investors worried and triggering a strong sell-off on the bond market.
According to SCMP, hundreds of bond sales have been postponed or canceled due to investor concerns about the financial health of local governments.
"We expect China’s localities to continue their budget deficits in the next 2 to 3 years. LGFV defaults are quite rare, but we cannot help but worry that the risk of default will not climb. ladder, "Standard & Poors said.
"Domino effect"
Last week, officials in Liaoning, Guizhou, Shanxi and Shaanxi provinces had to reassure the public by asserting that debt was under control, and at the same time, they would improve risk management and ensure reputation in the capital market. Accordingly, the Liaoning government requires state-owned companies to fulfill all their obligations and to disclose more transparent and detailed financial information.
Analysts from Guangfa said that an LGFV default can have a big impact on the whole economy of China more than a state-owned company default. "State-owned companies are heavily dependent on their ability to make profits, while LGFV is largely dependent on support from local governments."
"Only one financial channel will have problems, the whole government system of that province will be questioned by investors, thereby leading to systemic risks to the whole region," Guangfa stressed the influence. of a bond default on the entire government system of the Chinese provinces at present.
