Beijing Will Allow Local Government Default

 

Via reuters.com

WASHINGTON (Reuters Breakingviews) – Investors in Chinese bonds should prepare for a nasty surprise in 2018. Beijing’s tolerance for off-balance sheet municipal borrowing has faded as debt levels have exploded. In the name of repricing risk, regulators will allow the once-unthinkable: a big default by a local government financing vehicle.

LGFVs became popular in China during the global financial crisis. The budget law prevented localities from going directly into debt, but Beijing needed to stimulate quickly. With the connivance of the central government, regional officials created thousands of arms-length entities that could raise money to goose growth.

More than nine years have passed since Lehman Brothers collapsed, but these structures are still in business. They have around $600 billion worth of bonds outstanding issued domestically over the last two years, Fitch estimates, equivalent to 5 percent of GDP, but they keep running into trouble. In April, troubled LGFV Jiangsu NewHeadline Development became the first to be downgraded by an international ratings agency.

 

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