The recent spate of defaults by Chinese state-owned enterprises (SOEs) has undermined investor confidence in China’s debt market, and has led to a credit crunch for local government financing platforms (urban investment companies), which are facing difficulties in raising debt to finance their projects. Local governments have always relied on these financing platforms to raise funds for local construction projects, and many projects will come to a halt once they have difficulty accessing credit. The market is concerned that the negative effects of SOE defaults are being passed on to other parts of the Chinese economy.
Taiwan’s “Science and Technology Newsline” reported on Dec. 10, citing the Financial Times that the negative effects of China’s state-owned enterprise debt defaults are rapidly fermenting, and local government financing platforms (LGFVs), which are responsible for raising money for local governments, are facing a credit crunch crisis. LGFVs mostly appear as urban investment companies, and the bonds they issue are known as “urban investment bonds”. Local governments in the Communist Party of China (CPC) have always relied on the issuance of municipal bonds to raise funds for infrastructure development.
Dan Wang, chief economist at Hang Seng Bank, said, “LGFVs are one of the most important tools for local governments in China to achieve policy goals such as raising investment and creating jobs. If LGFVs are unable to obtain credit, many projects could be halted,” said Dan Wang, chief economist at Hang Seng Bank.
According to the report, LGFVs are of great importance to the Chinese Communist government, as they are one of the largest issuers of debt in China’s debt market, and the Communist Party’s local governments rely heavily on the funds borrowed from LGFVs for construction.
Data show that in the first three quarters of 2020, local government financing platforms in China offered 3.4 trillion RMB in bonds, up 31% from the same period in 2019. Executives at Ganjiang Urban Construction and Development Company, a financing platform based in Jiangsu province, revealed that their company is the largest debtor to local governments and the largest debtor to China’s financial system. Such financing platforms could run into trouble once the Communist government fails to bail out state-owned enterprises.
In China, returns on infrastructure projects such as roads and bridges are low, but bonds issued by local government financing platforms (urban investment bonds) have in the past received high credit ratings and can still attract the interest of market investors. However, after the recent successive defaults of SOE bonds, investors have lost confidence in highly rated SOE bonds and bonds issued by local government financing platforms no longer attract investors.
Wind data show that after the default of Yongcheng Coal Power’s debt, the total amount of debt issued by local government financing platforms in the CPC decreased by 14% compared with the same period in 2019.
The report noted that local government financing platforms are now not only unable to raise money in the debt market, but banks have also tightened their monetary stance on them.
Centaline Bank, a creditor of many LGFVs, has significantly tightened its lending criteria for LGFVs to control risks.
We used to work with any government-backed platform regardless of the fundamentals,” said the bank’s director. Now when we pass or reject loan applications, we pay careful attention to their leverage ratios and debt service resources.”
Also according to U.S. financial media CNBC, credit rating agency S&P Global Ratings (S&P Global Ratings) also warned that the next Chinese state-owned enterprises to face greater pressure will be local government financing platforms (urban investment companies), with more local financing platforms estimated to default on their debt.
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