The ability of fiscally stretched local governments to follow through on spending will be a key test
Shanghai/Hong Kong — China’s push to revive the economy this year by increasing infrastructure spending while warding off financial risks is facing headwinds from huge local-government debt, which is more than $9-trillion and growing.
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.“The LGFVs have become the black hole of the Chinese financial system.
Concerns 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.
The sources, who declined to give details, could not be identified due to the sensitivity of the matter. Faced with tighter credit criteria at home, LGFVs turned to offshore markets and raised a record $39.5bn via dollar bonds last year, according to ratings agency S&P. Offshore branches of Chinese financial institutions have been major buyers of the bonds, industry sources said.
The worsening outlook for LGFVs has also made some shadow banks — lenders for sectors that are unable to tap bank funding directly — worried about their exposure to such units and averse to fresh lending.
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