China debt: distressed state-owned financing vehicles eye long-term restructuring, even as ‘default is the easiest choice’

Mounting debt at local levels across China back in the spotlight after 20-year rollover raises concerns about how far banking sector has to go in handling the blow from cash-strapped firms that cannot repay loans on schedule

Transparency in borrowings and use of funds is often weak, prompting Beijing to become increasingly wary of so-called hidden-debt risks

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Infrastructure projects in China’s Guizhou province have resulted in mounting debt. Photo: Xinhua

Published: 6:30am, 10 Jan 2023

The controversial loan restructuring of a troubled state-owned company in one of China’s most indebted provinces reflects long-running credit problems facing various regions across the country, and analysts warn that this could be merely the tip of the iceberg when it comes to local governments’ mounting debt piles.

Zunyi Road and Bridge Construction Group, which is responsible for building infrastructure projects in Zunyi and other cities in Guizhou province, said in a stock-exchange filing on December 30 that creditor banks had agreed to a 20-year rollover of loans worth 15.6 billion yuan (US$2.28 billion).

The move made the company, which is also a local government financing vehicle (LGFV) for Zunyi to issue debt, the first LGFV to restructure its bank loans in China.

LGFVs are platforms that local governments use to borrow money – primarily off the budget – for infrastructure projects. Transparency in their borrowings and use of funds is often weak. Over the years, Beijing has become increasingly wary of the so-called hidden-debt risks associated with LGFVs and has sought to tighten its supervision over off-budget borrowing by local governments.

Analysts say the 20-year loan rollover is relatively rare, and that new interests payable on the loans are lower than current market rates, raising concerns about how far the banking sector has to go in handling the blow from cash-strapped LGFVs that are not able to repay loans.