More local government financing vehicles in China may seek debt reprieves including maturity extensions this year, after authorities issued clearer instructions on how to defuse one of the nation’s top financial risks.
(Bloomberg) — More local government financing vehicles in China may seek debt reprieves including maturity extensions this year, after authorities issued clearer instructions on how to defuse one of the nation’s top financial risks.
That’s the takeaway for analysts after Premier Li Keqiang highlighted regional governments’ debt pile as a key threat to financial stability alongside property woes in a key address Sunday to open China’s annual parliamentary meetings.
To achieve that, authorities must “improve the mix of debt maturities, reduce the burden of interest payments, and prevent a build up of new debts while working to reduce existing ones,” Li said.
“This indicates that the scope of debt control has expanded. The central government has shown an inclination to maintain the deleveraging campaign in the sector,” said Ming Ming, chief economist at Citic Securities Co.
Local government debt has featured prominently on Beijing’s policy agenda in the past decade as authorities sought to rein in the side effects of a rampant borrowing binge dating back to the global financial crisis. By setting a conservative growth target for 2023, policymakers have signaled an intention to strike a balance between preserving economic expansion and containing long-term financial risk.
The measures mentioned in Li’s report are in line with comments made by President Xi Jinping at December’s Central Economic Work Conference, which set the tone for economic policy making this year. Xi at the time urged provinces and municipalities to beef up efforts to resolve risk in hidden debt, or off-balance-sheet state borrowings including those by LGFVs.
However, Li’s report omitted the word “hidden,” suggesting concerns are also growing over local authorities’ on-balance-sheet debt after a rapid buildup in the past three years due to a housing slump and Covid-induced expenditures.
In order to dissolve risks in existing debt, local authorities will find it crucial to cooperate with financial institutions on debt swaps, Ming said, adding that some LGFVs that have exited public markets for fundraising may undergo restructuring.
“The era of excessive debt expansion by LGFVs is over,” he said.
Calling the central government’s instructions more “specific” this year, Guosheng Securities Co. analyst Yang Yewei said future debt reprieves will likely be in the form of loan maturity extensions, such as the recent one for a LGFV from the Southwestern province of Guizhou. Policymakers may also allow local authorities to issue refinancing bonds to swap for more costly borrowings, he added.
–With assistance from Jing Zhao.
(Updates with details in the sixth and seventh paragraphs.)
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