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Chinese Local Governments Issue Refinancing Bonds to Tackle 'Hidden' Debt Concerns

Chinese local governments are taking steps to address concerns about their substantial "hidden" debt, amounting to approximately $9 trillion. This debt has been accumulated off the books and is associated with local government financing vehicles (LGFVs) primarily used for funding infrastructure and social welfare projects. In response, at least six local governments, including Inner Mongolia, Tianjin, Liaoning, Chongqing, Yunnan, and Guangxi, have recently announced plans to issue refinancing bonds totaling around 320 billion yuan.

Chinese Local Governments Issue Refinancing Bonds to Tackle 'Hidden' Debt Concerns

The northeastern province of Liaoning, for instance, intends to issue 87 billion yuan in refinancing bonds to repay outstanding debt, while Yunnan, Guangxi, Chongqing, and Tianjin also plan to issue similar bonds, with respective values of 53.3 billion yuan, 49.8 billion yuan, 42.2 billion yuan, and 21 billion yuan. Inner Mongolia, an autonomous region, initiated this move by issuing 66.3 billion yuan in bonds.

Kenny Ng, a securities strategist at Everbright Securities International, noted that the issuance of refinancing bonds offers a short-term solution for local governments to manage impending debt maturities. This helps ease the debt burden while boosting investor confidence in LGFVs.

Local governments established LGFVs to raise bonds and invest in infrastructure projects to stimulate their economies. However, these projects are often expensive and require a long time to generate returns, making it difficult for LGFVs to meet their obligations. With cash flow issues exacerbated by the property market crisis, the "hidden" debt has grown to a staggering $9 trillion, leading to increased risk of LGFV defaults.

The decision to issue refinancing bonds follows a commitment made by China's leadership during the July Politburo meeting to develop strategies to address local government debt-related risks. This round of refinancing bonds is estimated to be valued at approximately 1.5 trillion yuan, according to local media.

China introduced special bonds for refinancing purposes as early as 2020 to assist municipal governments in reducing off-balance-sheet liabilities. It is estimated that nearly 1.2 trillion yuan of such bonds were issued in the three years leading up to 2022.

Despite these measures, some analysts have expressed doubts about their effectiveness. They highlight that the amount of refinancing bonds is relatively small when compared to the estimated 66 trillion yuan in borrowings by LGFVs, as reported by the International Monetary Fund. Critics argue that China's fiscal policy appears too conservative compared to its monetary policy and suggest further measures, including adjustments to loan prime rates and reserve requirements, may be necessary to address economic concerns, including ongoing issues in the property market.



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