China Slashes Local Gov’t Financing Platforms by 70% in Debt Cleanup

Over the past two and a half years, the number of local government financing platforms in China has been reduced by more than 70%, as a series of policies aimed at preventing and resolving hidden debt risks are implemented nationwide.

Joint efforts by central and local authorities have led to a 71% decrease in the number of financing platform companies and a 62% reduction in their outstanding debt as of last month compared to March 2023, according to the governor of the central bank during a recent legislative session.

As China ramps up initiatives to address local government debt, especially hidden liabilities, the significant decline in local government financing vehicles (LGFVs) marks a crucial step towards reducing fiscal threats and protecting the country’s financial stability, explained a finance professor from a leading university.

LGFVs are entities created by local governments and their agencies, often serving as semi-public investment firms to fund infrastructure and public projects. Before the 2015 update to the Budget Law, local governments lacked the legal authority to issue bonds, leading them to depend heavily on these vehicles for financing. The updated law now permits local governments to issue bonds directly, meaning most of these platforms have served their purpose and should gradually phase out, the expert noted.

The elimination of LGFVs has accelerated recently, driven by the government’s comprehensive debt cleanup strategy. In July 2023, the Ministry of Finance approved over 2.2 trillion yuan (roughly $309 billion) in local government bond quotas to address overdue payments and mitigate existing debt risks. As part of a broader plan announced last November, China intends to issue 10 trillion yuan (approximately $1.4 trillion) in government bonds from 2024 to 2028, replacing an equivalent volume of implicit debt.

The continued existence of LGFVs has contributed to the growth of covert local debt. Speeding up their closure is seen as essential to tackling the root causes of hidden liabilities, the expert added.