China pours more money into cheap loans to help regions deal with debt pile and aid economy
- China Development Bank is providing low-interest rate loans to help local government financing units roll over maturing debt, including loans
- Local government financing vehicle debt is estimated to account for 34 per cent of gross domestic product, according to China International Capital Corporation
China will look to tackle existing debt piles and contain the “grey rhino” risk in heavily indebted regions with a pilot programme to restore local financial capability.
Trillions of yuan in debt, built up over the past decade of government stimulus, has been one of the most persisting threats to the world’s second largest economy, where the scale could be further inflated as Beijing shows no sign of dumping the debt-fuelled model to counter the economic slowdown, compounded by the fallout from the trade war with the United States.
Worries are mounting particularly after state media reported that policy lender China Development Bank has agreed to provide a large amount of 10-year loans annually to help local government financing vehicles (LGFVs), which includes state firms and entities, in Zhenjiang, a city 200km west of Shanghai roll over their maturing debt. Financial risks of LGFVs are likened to “grey rhinos” as they are highly possible yet ignored threats that are preceded by few early warning signs.
“If it was extended nationwide, it could reinforce investor obsession over LGFV debt and discount the long-standing efforts to separate it from local government debt,” said Tan Xiaofen, deputy dean of the school of finance at the Central University of Finance and Economics in Beijing.
Although local financial vehicles face high repayment pressure in 2019-2020, the risk is under control as policy support has returned amid the economic stabilisation. Policymakers still need to evaluate the pilot [scheme]. But we don’t think there will be another round of local debt swap nationwide.
He also warned it could also expand piles of implicit liabilities and plunge domestic policymaking into a vicious cycle.
