Local government financing vehicles (LGFVs) are facing a severe build-up of credit guarantees, leaving them open to rising default rates amid wider financial market uncertainty, Bloomberg reports.
Around 2,000 LGFVs have offered a combined sum of Rmb 7 trillion ($1 trillion) of guarantees to loans and fixed-income securities, exceeding the total value of their own outstanding local bonds.
Such guarantees are often useful means for private sector firms to gain the attention of banks which generally prefer to lend to state-owned companies.
Local governments have been under instruction by Beijing to reduce their debt holdings, including off-balance sheet activity which includes guarantees by LGFVs. Last month, ratings agency Standard & Poor’s called China’s local government debt problem “an iceberg with titanic credit risks.”
Authorities have discouraged local governments from backing LGFVs, fearing that the risk of non-payments by guaranteed firms could infect other areas of the financial sector. According to Bloomberg data, Chinese corporations have defaulted on Rmb 96 billion of local bond payments so far this year – three times the previous year’s total.