This $1.2 Trillion China Bond Market Is Studded With ‘Fakes’
Not a single local government financing vehicle, or LGFV, bond has failed to meet its obligations, despite scant cash flow and a number of close calls.
One corner of China’s bond market is offering yields that seem too good to be true. And, indeed, it’s permeated with “fakes.”
Since 2009, off-balance-sheet shell companies set up by Chinese municipalities have been selling debt to fund infrastructure projects. Called local government financing vehicles, or LGFVs, they were initially intended to supplement the stimulus Beijing launched to rescue China’s economy after the 2008 credit crisis. In the past 10 years these vehicles have amassed a huge pile of debt: 33 trillion yuan ($4.7 trillion), according to S&P Global Ratings. Of that, about 8.3 trillion yuan, or $1.2 trillion, is in bonds.