China set its GDP growth target at 6 percent this year, saying the level is “not low” and that “going fast for a while is not necessarily stable”. Some analysts say that this comment is related to China’s local debt concerns and the financial risks that arise. Japanese media reported that China’s hidden debt is high, the scale is expected to reach 43 trillion yuan, almost equal to half of the gross domestic product (GDP), plus the local government financing vehicles (Local Government Financing Vehicles, LGFV) will have 3 trillion yuan bond maturity this year, once If local governments default, it will hit the market’s confidence in China’s economy.
Foreign media reported that since the second half of last year, Chinese state-owned enterprises Yongcheng Coal and Power and Tsinghua Ziguang Group burst into default, investors are worried about the debt problems of the Chinese public sector, directly shaking the assumptions of the Chinese government on hidden debt guarantees. According to the China Chengxin International Credit Rating, total hidden debt, including borrowings from local government financing platforms (LGFVs), is RMB 43 trillion by the end of 2019, and about 60% is held by banks.
These debts are the result of a decade-long spending spree by the authorities to support the economy, especially during periods such as the trade war with the U.S. and the new crown pneumonia Epidemic. Among them, local debts are the most worrying, as Chinese provinces and cities rely on LGFV financing for infrastructure development, which not only exploded in money shortage but also the risk of default continues to climb.
The report cited research firm Gavekal Research as saying that LGFV bond sales alone soared 76 percent to 290 billion yuan in January, and since late December last year, Chinese provincial governments have also issued a total of 500 billion yuan in bonds that can be used for on- and off-balance-sheet extensions.
Moody’s data also shows that 2,000 LGFVs in China have bonds maturing this year for more than CNY3 trillion, which is just part of a record CNY10.4 trillion in bonds. Last year, local governments in China spent 90% of their total revenue on debt service, and even though there have not been any local government defaults, local governments have limited ability to handle their own debt. Analysis says China’s economy is “fat”, and as fiscal and financial pressures increase and the government’s willingness to bail out borrowers is limited, watch out for “debt mines” to erupt one after another.
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