China moves to limit hidden debt risks

Finance | Reuters and staff reporter 27 Jul 2021

China is stepping up restrictions on financing to local government financing vehicles to mitigate risks from hidden debt, the official Securities Times reported yesterday.

Several banks and insurers are connecting their systems with a platform of the Ministry of Finance that monitors liability and expenditure of LGFVs, the newspaper said, citing industry sources.

Local governments have been under pressure to boost economic growth through infrastructure spending via LGFVs, but the risk of defaults has raised jitters in financial markets as Beijing has signalled it will allow some heavily-indebted LGFVs to fail.

In future, banks and insurers will refrain from providing fresh liquidity to those platforms that enjoy implicit guarantees from local governments, and will prevent hidden debts from increasing, the report said. Some projects backed by local governments have already been halted after failing to obtain bank loans due to tighter scrutiny, it said.

Local government debt outstanding stood at 25.7 trillion yuan (HK$30.82 trillion) at the end of 2020, public data shows, but LGFVs have accumulated massive hidden debt that threatens financial stability, analysts say.

In other news, the State Administration of Foreign Exchange said it will expand the scope of pilot programs to facilitate individual foreign exchange services, including cross-board investment by private equity funds, cash-pooling service for multinational companies, the facilitation of foreign exchange receipts and payments.

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