How Local Financing Is Adding to China’s Risky Debt

Cracks are showing in a pillar of China’s debt market: local government financing vehicles (LGFVs). They were created to fund such things as municipal infrastructure and, because they rarely generate enough returns to cover their obligations, most rely on refinancing and injections of cash to stay solvent. As a result, their collective debt load has ballooned to as much as $7 trillion, a liability that’s becoming harder to sustain for municipal governments that were stretched by heavy spending during the pandemic and a national housing slump. It’s a situation that’s starting to ring alarm bells for bond investors.

LGFVs were originally established to skirt around a ban on municipal authorities borrowing from banks or selling bonds directly in the market. The money they raise is spent directly on things like roads, bridges, subways and state welfare projects that can take a long time to finish and often generate low returns. Investors generally assume that local governments are held accountable for these debts.