China’s dilemma about the curious breed of financial firm

Slocal self hina financiers have a complex identity. In their responsibilities for land development and public works, they act on behalf of the city and provincial authorities and with their approval. But at the same time they represent large companies known as local government funding (lgfvs) that have the potential to attract billions of dollars from global investors. Thousands lgfvnationwide owed about 53 trillion yuan ($ 8.3 trillion, equivalent to 52% per annum). GDP) in debt last year.

Conflicts of interest from the heads of these hybrid firms naturally arose. In some cases, they were caught when friendly private companies gave lucrative stakes in government projects. Others used their official status to guarantee bank loans to friends. In Sichuan Province, it was recently revealed that a government financier had lent public funds to private firms at rates up to 20% per year. In Hunan Province, a chief was caught charging companies working with the government for consulting and paperwork. This practice can be used in the private sector, but not in anti-corruption investigators.

The central government is showing new interest in such cunning deals. More than 40 high-ranking officials on lgfvsince the beginning of the year have been under investigation or detained. The Ministry of Finance has warned provincial authorities about the risks of corruption in the quasi-public sector. Renewed attention to vaccination in lgfvs betrays growing concerns about the role of companies in delivering economic growth, as well as the piles of debt they have accumulated in the process.

lgfvs are an exclusively Chinese problem. Invented in the 1990s to circumvent rules prohibiting local governments from accumulating debt, companies have become one of the most important sources of economic growth over the past two decades as they have implemented a huge number of government projects. Their non-governmental status allowed them to borrow heavily from investors in China and abroad. One of the quirks lgfvwith the fact that it is the city and provincial authorities on the hook for these debts. But lgfvborrowings are not included in official state budgets, which makes it difficult to assess risks.

The latest study brings with it two complications. For starters, it happens at an awkward moment. The economy has been hit hard by recent blockades to contain Covid-19. In response, China’s leaders announced plans for infrastructure spending this year to help achieve A high GDP– target growth of 5.5%. lgfvS will typically play a key role in financing and contracting most construction activities across the country. But dispersing corruption and other restrictions mean managers will be less at risk. Usually this will be considered a good thing. This time, however, the reluctance to undertake new projects may come at a price GDP growth at a time when the Communist Party cannot afford it.

Moreover, tighter surveillance has led to unintentional exposure lgfvwith currency risk. To issue bonds in China, companies must obtain the permission of regulators. Closer control over their use of funds has led to the issuance of land debts lgfvin the first four months of 2022 it decreased by 22% compared to the same period last year. This pushed the company into a riskier offshore market: the issuance of dollar bonds lgfvAccording to the rating agency Pengyuan, over the same period it grew by about 150%. But few of these companies receive dollar income, which complicates the redemption of bonds. Send by default shock wave through the bond market.

Such dangers explain why Beijing technocrats want to diminish value lgfvs, especially since local governments can now issue bonds directly, reducing the need for simple workarounds. However, while the goal of growth is in jeopardy, lgfvs going nowhere.

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