The politics of debt after the NPC

CHINA ADVISORY - Report 04 Apr 2023 by Andrew Collier

China is struggling with high debt. The weakest portion is concentrated in the local investment companies, Local Government Financing Vehicles (LGFVs), with an estimated 50 to 60 trillion yuan. They emerged from the 2009 financial crisis and have since become the principal support for the property sector and local government finances—making up for China’s weak tax base. The LGFVs traditionally have supported local governments, recently, by purchasing land under short-term contracts. Due to their high debt and low returns, they are financially weak and most are close to default.

What is the solution? The central government is increasing stimulus through bank loans. The government also is forcing regional banks that own the majority of LGFV loans, and bonds, to lower interest rates, squeezing bank profits. Even with bank support, many LGFVs will be forced to default or be acquired by local companies.

As a result of this fiscal conundrum, the central government will have to make tough decisions on which and how many local banks to bail out through bond swaps or other financial engineering. Sitting on top of this, the newly formed Party financial regulatory bodies will be taking on the burden of debt restructuring with inadequate personnel and financial resources.

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