Analysts warn of default risks for China’s weaker LGFVs

Analysts suggest that China’s weaker local government financing vehicles (LGFVs) face higher default and missed payment risks due to escalating financing costs, a property crisis, and maturities. The Asia-Pacific’s delinquency rate among high-yield issuers is predicted to increase further as a result of this, creating upward pressure.

As one of China’s primary offshore bond issuance sectors, the LGFVs are threatened by a financial crisis that could spill over into the more extensive bond market, endangering the economy’s systemic financial stability. While missed payments might initially be observed outside the public bond market, analysts suggest that they will become more widespread. These financing platforms are crucial to local governments for securing off-budget capital and assisting in infrastructure and public initiatives.

According to Lianxin, LGFVs will have to cope with higher pressure to repay their debts as refinancing conditions become stricter with the US Federal Reserve’s plan to keep raising interest rates. On Thursday, Lianxin also revealed that about 84% of the total offshore debt of LGFVs, which is approximately USD 84.2 billion, will mature between 2021 and 2025. Due to the costly COVID-19 control measures, a decrease in revenue from land sales, and a slowdown in the economy, local governments are facing difficulties in repaying their debts.

For instance, Zunyi Road and Bridge Construction Group from Guizhou Province recently extended their 20-year-old loans valued at CNY 15.6 billion (USD 2.27 billion). Moody’s pointed out the vulnerable investor sentiment and the potential adverse effect on the bond market. A sudden LGFV bond default resulting from a gap in support from regional local governments might trigger the spread of the problem to the onshore bond market, affecting RLGs, financial institutions, and SOEs. S&P Global noted that weaker LGFVs could have a higher possibility of default, given that they rushed to the offshore bond market despite the elevated costs last year.

According to analysts, China’s LGFVs face an increased risk of default and missed payments, owing to higher financing costs, a property crisis, and a wave of maturities that have impacted local authorities’ balance sheets. Analysts believe this could lead to an increase in delinquency rates among high-yield issuers in the Asia-Pacific and even pose a threat to systemic financial stability in the world’s second-largest economy.

The outstanding balance of LGFVs’ offshore debt is around $84.2bn, of which 84% will mature between this year and 2025. While LGFVs do not depend on offshore financing channels to the extent commercial homebuilders do, there could still be a spill-over effect on the broader bond market. Moody’s has highlighted the fragile investor sentiment and likely spillover effect on the bond market.

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