A report just released by S&P Global Ratings has warned of a rise in defaults by entities used by Chinese local governments to issue bonds.
These entities, known as local government financing vehicles (LGFVs), have been used by Chinese local governments to keep debt off their balance sheets while financing the building of infrastructure or the implementation of social projects.
S&P estimates between RMB30 trillion-RMB40 trillion (USD$4.5 trillion to USD$6 trillion) in local government debt may have been issued in this way. When this LGFV debt is added to official debt, S&P estimates total government debt to GDP may be around 60%, a figure which S&P referred to in the report as “alarming”.
According to the Chinese State Council, all LGFV borrowings since 2015 are classified as corporate debt. S&P expects government support to be withdrawn over time in order to facilitate a transition to “more typical state-owned enterprises”. As such, it does not expect the central government or provincial governments to shore up LGFV deficiencies. “We believe the central government and the market have more tolerance for defaults by LGFVs and more will be on horizon.”