According to Bloomberg, China’s local government branches may have accumulated nearly 40 trillion Yuan ($6 trillion USD) in off-balance sheet debt obligations with further defaults in store, with figures from S&P Global Ratings.
Key highlights
2018 has seen a record number of local-level government defaults within China, with nearly 50 billion Yuan in missed bond payments already recorded for the year.
The Chinese government has set a new limit on the issuance of local-government bonds, and the new limit is considered too low in order to fund government infrastructure projects or support regional growth, and the cap on borrowing bodes poorly at a time when the broader Chinese economy is already seen beginning to slow down.
Defaults on Local Government Financing Vehicles (LGFV) have been steadily rising for several even as China’s national government looks to clamp down on leverage within their financial system, and borrowing-fueled government spending as a growth factor is beginning to become an increasingly more difficult burden manage.
Even with the central government’s shift toward stimulus, however, S&P sees Beijing determined to “bring discipline to the financing practices of local governments and their LGFVs.” That ultimately may mean local authorities aren’t fully able to keep LGFVs afloat, however, and the bottom line is “the default risk of LGFVs is increasing.” – Bloomberg
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