The finances of China’s local governments are once again capturing the attention of capital markets participants, but for very different reasons.
Just a few years ago, local government debt was seen as a risk to China’s financial stability, with analysts raising the alarm over previously undisclosed obligations totalling trillions of renminbi.
Far from bringing down the system, however, bonds from local government financing vehicles have today become popular investments, gaining a strong following both onshore and offshore.
Already LGFVs make up about 35% of the onshore credit market, while HSBC puts the total of offshore US dollar bonds outstanding at about US$19bn. As of November 16, the sector accounted for almost 10% of investment-grade issuance from China in 2016.
There is far more to come. The banking regulator has a list of about 11,000 LGFVs, covering everything from urban construction to airports and power distribution. So far, about 1,700 have sold bonds onshore, and only 41 have tapped the international market.
The combination of higher yields and government support is luring investors to the sector. But some fundamental concerns still linger: on a standalone basis, the vast majority of LGFVs are highly leveraged, often loss-making entities, and a spike in local bond defaults has made it clear that China is withdrawing support for some state-owned enterprises.
IFR brought together a panel of specialists in October to discuss the challenges and opportunities as more LGFVs turn to the capital markets to replace bank debt or fund new projects. The debate on these pages – and indeed the pace of issuance since the discussion took place – makes it clear that China’s local governments are now a sought-after asset class in their own right.
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