: China’s local government financing vehicles are chipping away at their $1.6 trillion pile of debt, as regulators aim to curb the sector’s credit risk. 

LGFVs saw their largest quarterly financing outflow in the second quarter since Fitch Ratings Inc. began to track the data in 2018. Net financing - new yuan bond issuance minus maturities - for the period came in at negative 179 billion yuan ($24.6 billion), marking the third consecutive quarter of net outflows. 

This trend stands in contrast to earlier years, when the LGFV bond market continued to expand despite authorities’ efforts to keep it in check. 

The shrinking of LGFV debt highlights the government’s determination to rein in the sector and deleverage local governments, which have been hit hard by sliding land sales. Even so, reducing LGFVs’ debt remains a daunting task. LGFVs’ outstanding bond balance stood at 11.5 trillion yuan ($1.6 trillion) as of June 30, according to Fitch Ratings.

“Strictly controlling additional debt is the current policy priority,” said Yao Yu, founder of Shenzhen-based credit research company Ratingdog.  

During a key policy meeting last year, Beijing vowed to set up a long-term mechanism to resolve debt risks tied to local authorities. Since the fourth quarter, regulations over new LGFV bond issuance have tightened.

LGFVs also face a record amount of maturing local bonds this year. To help avoid defaults, the government has rolled out new policies, including a 1 trillion yuan refinancing program and a push to get banks to extend loans. Such moves have helped drive LGFVs’ borrowing costs to new lows.  

Some LGFVs are turning to other financing channels for new funds. Many of China’s biggest state banks have been offering LGFVs long-duration loans and temporary interest relief since the second half of last year, Bloomberg previously reported. 

As LGFVs turn to bank loans to refinance their bonds, “we expect LGFV onshore bond net issuance to remain subdued over the rest of 2024,” said Zerlina Zeng, head of East Asia corporate credit research at Creditsights Singapore LLC.

Most LGFVs issue debt to finance projects that would take years to generate profits. They also focus on infrastructure projects such as highways and roads that may not be financially sustainable on their own. As a result, many LGFVs rely heavily on local government subsidies to get by. 

But the growing size of LGFV debt has raised alarms for both local governments and authorities in Beijing. Earlier this year, China’s securities regulator asked some investors to refrain from increasing their exposure to LGFV dollar bonds with tenors of less than a year.

The government’s deleveraging efforts will continue to weigh on LGFV bond issuance, Ratingdog’s Yao said.

  - Bloomberg