China's debt clampdown raises risk of local government financial defaults

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Representative Image
Representative Image

Beijing [China], May 27 (ANI): China's debt clampdown has raised the risk of a wave of defaults among the country's heavily indebted local government financing vehicles (LGFVs) for the first time, causing concern in financial markets.

The central government has set a modest economic growth target of above 6 per cent for 2021, but it highlighted debt reduction as one of five major tasks this year as it seeks to cut excess housing inventory and reduce overcapacity in certain sectors, reported South China Morning Post (SCMP).

This comes as defaults for Chinese onshore bonds has reached up to 60.84 billion yuan in the first quarter, an increase of 18.3 per cent from last year, according to the National Institution for Finance & Development.

"Notably, the government said in April that insolvent local government financing vehicles should go bankrupt... Since LGFV bonds have never defaulted before, it could cause market jitters if it happens for the first time," said Larry Hu, chief China economist at Macquarie Group, on Tuesday.

In April, the State Council, the government's cabinet, said that LGFVs, which are used by local governments to sidestep borrowing limits, should restructure or go bankrupt if they are unable to pay back debt, SCMP reported.

These financing platforms have contributed to a sharp rise in off-budget local government borrowing over several years, which Beijing is now seeking to control. There are already signs that some LGFVs have been slowing the issuance of new debt because of the tougher requirements from stock exchanges.

Banny Lam, head of research at CEB International Investment, said if LGFVs were to default for the first time it would hit investor confidence, so the central government is likely to minimise the risk in such a case while avoiding a direct bailout.

Meanwhile, Moody's downgraded the state-owned company's ratings late last month, citing its "weakened funding profile due to market volatility", reported SCMP.

The agency said that while the Chinese government over the past 18 months appears to be placing greater emphasis on burden-sharing by creditors of financially distressed state-owned enterprises, making it "more difficult to estimate the government's willingness to provide timely support to some State-Owned Enterprises". (ANI)