China Local Governments to Sell $206 Billion of Financing Debt

China is considering stronger action to address risks from local government financing vehicles, with Caixin reporting on a plan to give the businesses cheap funding as debt concerns mount.

(Bloomberg) — China is considering stronger action to address risks from local government financing vehicles, with Caixin reporting on a plan to give the businesses cheap funding as debt concerns mount. 

The central bank may set up an emergency liquidity tool with banks to provide low-cost funds with longer maturities to LGFVs, Caixin reported on Saturday, without saying where it got the information. 

The move, if approved, would give cash-strapped LGFVs access to funds to improve their cashflow and avoid short-term liquidity stress. There are no official figures for the size of LGFV debt, although the International Monetary Fund estimates it was 57 trillion yuan ($7.8 trillion) last year.

Tommy Xie, an economist at Oversea-Chinese Banking Corp., said the reported plan for a central bank-led funding initiative would be a “pretty big change” from previous efforts. 

“If the central bank takes a lead on this, it will provide liquidity to help address the local government debt and may ease the problem to some extent,” he said.

In addition to the cheap funding for LGFVs, Beijing is also mulling plans to cut their debt. Bloomberg News reported earlier that authorities are considering allowing provincial-level governments to raise about 1 trillion yuan via special bond sales to repay the debt of LGFVs and other off-balance sheet issuers. 

Twelve provinces and cities have been identified as “high-risk” areas where more support will be provided, including the provinces of Guizhou, Hunan, Jilin and Anhui, as well as Tianjin city, according to people familiar with the matter.

Caixin also reported on the plan to sell bonds, putting the amount at 1.5 trillion yuan. 

Possible Job Cuts

Caixin said one southwestern province that will be receiving a relatively large refinancing bond quota may need to cut 20% of civil servant jobs as part of the condition of receiving the financial support.

While it’s not entirely clear when the refinancing bonds will be issued, various localities chosen for the issuance have completed a review and their plans are expected to be submitted within one to two weeks, Caixin cited an unidentified person as saying.

Investors have highlighted LGFV debt as a top threat to the economy, while President Xi Jinping has previously described the issue as one of the “major economic and financial risks” facing China. 

Beijing’s latest plans to deal with the debt problem came after the government began a round of nationwide inspections to work out how much money local governments owe. The Communist Party’s Politburo, its top decision-making body, said in July that it would use a package of measures to resolve local government debt. 

Providing cheap bank loans would mark a new step in funding support for LGFVs. In 2019, the Jiangsu government in eastern China selected Zhenjiang city as a pilot test case to provide low-cost funding to resolve the city’s debt problems. China Development Bank was reported at the time as leading a group of lenders offering long-term lending to financing platforms in the city.

The PBOC has made use of special tools to provide funds to targeted areas in the past. The central bank in 2014 set up the pledged supplementary lending facility to provide cheap funding to policy banks so they could lend it on to local governments for shantytown renovation projects. 

That support helped to turn around a property market slump at the time but was heavily criticized later for inflating the real estate bubble in lower-tier cities. The PBOC provided over 3 trillion yuan in PSL loans through the program.

Here’s a look at the steps China is taking to address LGFV debt:

  • PBOC to set up an emergency liquidity tool with other banks, according to Caixin
  • About 1 trillion yuan in refinancing bonds to be sold by some local governments to repay LGFV debt, with authorities identifying 12 regions where more support will be provided, Bloomberg reported earlier this month
  • State banks ramped up loans with ultra-long maturity and temporary interest relief to LGFVs, Bloomberg reported in July
  • A fresh round of nationwide inspections to work out how much money local governments’ owe, Bloomberg reported in June
  • An LGFV in Guizhou province extended its bank loans for two decades in January after Beijing’s nod

–With assistance from Jing Zhao, Andrew Monahan and Tom Hancock.

(Updates with bullet points on government measures)

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