Business / Economy

Debt crisis looms for local governments

By ZHENG YANGPENG (China Daily) Updated: 2014-06-18 08:26

Yan Wentao, an analyst with China Chengxin, said what makes the situation worse is the fact that the local government financing vehicles, a major channel through which local governments raise funds, rely heavily on land as their assets. The possible shrinkage in land value will threaten the borrowing and repayment capabilities of LGFVs.

Debt crisis looms for local governments
Debt crisis looms for local governments
"The sagging property market will certainly weaken LGFVs' balance sheets as the largest asset for them is land. Most LGFVs rely on land as collateral to secure bank loans. For some individual LGFVs the repayment pressure is mounting," Yan said.

There are some comforts, according to Yan. The mismatch between local governments' short-term debt and long-term possibility of projects profitability was somewhat alleviated by the regulator's permission to extend maturity and debt roll-over. The Ministry of Finance has also allowed 10 provinces and cities to sell bonds in their own names, a pilot program that is expected to be rolled out nationwide, to help reduce borrowing costs.

But so far, most of the local governments have issued debt indirectly through LGFVs and other government-related entities. With the central government curbing bank loans, most of these entities have shifted to trusts and other innovative products for financing.

Such trends complicate the ability of the government to monitor debt and the ability of market participants to judge the real indebtedness of local governments. The China Chengxin report said an increasingly salient problem is that while benefits of debt raising go to lower county-level governments or even township governments, risks aggregate upward to higher authorities such as provincial governments.

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