Chinese credit spreads widened to a two-year high this week as the threat of local government debt defaults weighs on investors.
The spread between five-year Chinese government bonds and AA- (considered junk in China’s domestic bond market) five-year medium-term notes reached 3.6% on Monday, the Financial Times reports.
Some of China’s biggest borrowers are local government financing vehicles (LGFVs) that allow non-federal government bodies to take on additional credit for local infrastructure projects. Much of the country’s existing debt crisis comes from aggressive borrowing by LGFVs.
An LGFV is yet to default on a publicly traded bond, but Beijing’s strict deleveraging campaign alongside the news of missed payments by LGFVs in Tianjin and Yunnan earlier this year is hinting that implicit guarantees on local government debt are about to be weakened.