According to the governor of China’s central bank, the country has slashed the number of its local government financing vehicles (LGFVs) by 71% and cut their business-related financial debt by 62% since early 2023. The reductions stem from a broad debt resolution initiative launched in July 2023, which included roughly RMB 1.5 trillion ($210 billion) in special refinancing bonds to repay hidden government debt and instructions to commercial banks to restructure or replace high-interest LGFV loans across 12 high-risk provinces.
An April IMF report estimated that LGFVs had RMB 58 trillion ($8.17 trillion) of debt on their books, so the refinancing bonds appear to be a very small percentage of the overall relief. What this seems to mean is that the debt has either been written off or absorbed into the system. Somebody will have lost out, and that is likely to be the state banks, as no other institutions have the ability to absorb such losses or to take on the debts in the first place. There is something to be said about a system that has the willingness to do such a thing, but it does not solve the fundamental issue at the heart of China’s economic debt.
Those that were responsible for building up the debt in the first place have functionally been let off the hook. Local officials still have centrally set quotas to meet, and unless there are more solid safeguards put in place, it is likely that we will see the repeat of the same tactics that led to the original rise in debt.