Local Government Financing Vehicles (LGFVs) initially bore the brunt of the deleveraging campaign in China and the crackdown on shadow financing. But since last year, local governments have once again become reliant on LGFVs to the fill the holes in their budgets and boost growth. Local governments are under severe strain from the slump in land revenues (-28.5% y/y in the first eight months of the year).
However, a growing number of LGFVs are falling behind on commercial paper debt. LGFVs – off budget entities – are a systemic risk. The stock of total LGFV debt at the end of 2021 stood at Rmb54.4tr ($7.82tr), or around 44% of nominal GDP. LGFVs are thought to have an implicit guarantee from local governments, but the deterioration in local government finances is now putting this assumption into question.
The augmented fiscal deficit widened to $833bn in the first eight months of the year, up 50% on the same period in 2020. As share of GDP, the augmented fiscal deficit is projected to hit 9.2% this year, compared with 8.4% in 2020.
Ahead of the Congress, banks have been instructed to provide $85bn in property funding in the final four months of the year. The Hang Seng Mainland Properties Index was up 5.4% yesterday. But the Hang Seng Mainland Banks Index slumped another 2.3%. The drop in bank share prices is telling. If the risks are simply transferred onto bank balance sheets, or LGFVs, this will only delay, and potentially exacerbate the current crisis.
