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China Pulls Support From Local Funding Vehicles to Cut Risk

  • State Council asks LGFVs to restructure if they can’t repay
  • Local builders have yet to default on publicly traded bonds

Chinese authorities want failing local government financing vehicles to restructure or go bust if they can’t repay their debts, suggesting the state-linked sector is closer to seeing its first defaults on publicly traded bonds.

The LGFVs should “implement bankruptcy proceedings or liquidation in accordance with the law if they lose their ability to pay,” according to a statement by the State Council -- or China’s cabinet -- posted on Tuesday. Local governments should not rely on LGFVs to finance their activities, the statement said, and LGFVs are banned from accepting documents offering guarantees from local officials or departments.