Jiangsu Restricts New Borrowing by Highly Leveraged LGFVs
What’s new: As the largest local government bond issuer, eastern China’s Jiangsu province issued rules restricting new debt issuance by local government financing vehicles (LGFVs) that are highly leveraged and have mediocre operating performance and poor growth prospects.
For highly leveraged LGFVs with poor performance, debt increases must be approved by investors, according to guidance issued earlier this month by the provincial government. LGFVs with good financial results and low debt ratios can still increase operational debt by a certain amount. LGFVs are special purpose vehicles set up by local authorities to borrow money to fund infrastructure and public welfare spending.
The guidance also requires local governments in Jiangsu province to obtain a clear and full picture of their total debt and implicit debt, with a focus on the amount of borrowing by financing vehicles in counties, cities, districts and various development parks.
The background: Local government debt, in particular trillions of yuan of liabilities hidden in LGFVs, threatens to overwhelm dozens of authorities across the country.
In 2019, Zhenjiang, a city in Jiangsu famous for its fragrant black vinegar, was at the center of a debate and a battle within government, policymaking and financial regulatory circles about how to clean up trillions of yuan of hidden local government debt accumulated by LGFVs.
The combined debt of all 18 LGFVs in Zhenjiang was almost 14 times the city’s general fiscal revenue of 28.4 billion yuan ($4.42 billion) in 2017, the highest ratio among all cities in Jiangsu, which itself is one of the most debt-laden provinces in China, Guosheng analysts estimate.
China issued 4.55 trillion yuan in new local government bonds in 2020, data from the Ministry of Finance showed. As the government battled last year to reboot an economy pummeled by the Covid-19 pandemic, it opened the debt spigot.
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