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Li Lixing on Debts of LGFVs

Nov 26-2019   



 

SOEs are responsible for the bulk of Chinese corporate debts. By the end of 2018, non-financial SOEs had debts of 135 trillion yuan and total assets of 210.4 trillion yuan, or 64.2% of debt-to-asset ratio. At a recent forum hosted by the NSD, Prof. Li Lixing drew attention to a special type of SOE.

 

Called Local Government Financing Vehicle (LGFV), such entities have sent the debts of local governments skyrocketing. They have been set up for mainly four purposes: financing, provision of public goods, land development, and as fund investors. Their debt payment usually hinges on government assets or guarantee.

 

The number of LGFVs soared from 6,576 in 2012 to over 10,000 in 2012, more than one per county. In 2018, they issued 2,842 urban investment bonds in open markets and raised 2.5 trillion yuan.

 

Many LGFVs are infused with such assets as urban roads and parks that cannot generate cash flows. In other cases, good assets of one LGFV are stripped away and injected into another LGFV to get more financing. No wonder many LGFVs are mired in debts. Despite efforts by the central government, local governments are not fully motivated to tackle LGFVs as long as the need for economic development prevails.

 

Prof. Li argued that LGFVs should be included in SOE reforms and focus should be put on such issues as non-separation between governments and enterprises, governments’ administrative interventions and overall guarantee, as well as soft constraints. In the long term, governments should not dominate economic development but act as a provider of public goods. In the midterm, it’s advisable to expand the fiscal budget, strengthen budget constraints, heighten supervision of financial departments, and prompt LGFVs to undertake market-oriented transformation. In the near term, to cope with debt crises, SOEs should consolidate and capitalize assets and attract private investment, while at the same time some LGFVs will just have to declare bankruptcy or undergo debt restructuring.

Li Lixing on Debts of LGFVs

Nov 26-2019   



 

SOEs are responsible for the bulk of Chinese corporate debts. By the end of 2018, non-financial SOEs had debts of 135 trillion yuan and total assets of 210.4 trillion yuan, or 64.2% of debt-to-asset ratio. At a recent forum hosted by the NSD, Prof. Li Lixing drew attention to a special type of SOE.

 

Called Local Government Financing Vehicle (LGFV), such entities have sent the debts of local governments skyrocketing. They have been set up for mainly four purposes: financing, provision of public goods, land development, and as fund investors. Their debt payment usually hinges on government assets or guarantee.

 

The number of LGFVs soared from 6,576 in 2012 to over 10,000 in 2012, more than one per county. In 2018, they issued 2,842 urban investment bonds in open markets and raised 2.5 trillion yuan.

 

Many LGFVs are infused with such assets as urban roads and parks that cannot generate cash flows. In other cases, good assets of one LGFV are stripped away and injected into another LGFV to get more financing. No wonder many LGFVs are mired in debts. Despite efforts by the central government, local governments are not fully motivated to tackle LGFVs as long as the need for economic development prevails.

 

Prof. Li argued that LGFVs should be included in SOE reforms and focus should be put on such issues as non-separation between governments and enterprises, governments’ administrative interventions and overall guarantee, as well as soft constraints. In the long term, governments should not dominate economic development but act as a provider of public goods. In the midterm, it’s advisable to expand the fiscal budget, strengthen budget constraints, heighten supervision of financial departments, and prompt LGFVs to undertake market-oriented transformation. In the near term, to cope with debt crises, SOEs should consolidate and capitalize assets and attract private investment, while at the same time some LGFVs will just have to declare bankruptcy or undergo debt restructuring.