Jiangsu restricts new borrowing from high-leverage LGFVs

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What’s up: As the largest issuer of local government bonds, Jiangsu Province in eastern China has issued rules limiting new debt issuance by local government finance vehicles (LGFVs) which are heavily taxed. indebted and have poor operational performance and poor growth prospects.

For high leverage and poor performing LGFVs, the debt increases must be approved by investors, according to guidelines released earlier this month by the provincial government. LGFVs with good financial results and low debt ratios can further increase operational debt by a certain amount. LGFVs are special vehicles set up by local authorities to borrow money to finance infrastructure and public welfare spending.

The guidelines also require local governments in Jiangsu Province to get a clear and complete picture of their total and implied debt, with an emphasis on the amount of borrowing by financing vehicles in counties, cities, districts and various development parks.

The background: Local government debt, especially the trillions of yuan in liabilities hidden in LGFVs, threatens to overwhelm dozens of authorities across the country.

In 2019, Zhenjiang, a city in Jiangsu famous for its fragrant black vinegar, was at center of debate and battle within government, policymaking and financial regulatory circles on how to clean up trillion yuan of hidden local government debt accumulated by LGFVs.

The combined debt of Zhenjiang’s 18 LGFVs was nearly 14 times the city’s general tax revenue of 28.4 billion yuan ($ 4.42 billion) in 2017, the highest ratio of any city in Jiangsu, which is itself one of the most indebted provinces in the country. China, Guosheng analysts say.

China issued 4.55 trillion yuan of new local government bonds in 2020, according to data from the Ministry of Finance. As the government fought last year to restart an economy hit by the Covid-19 pandemic, it open the debt tap.

Quick Takes are condensed versions of stories related to China for quick news that you can use. To read the full story in Chinese, click here.

Contact journalist Denise Jia ([email protected]) and editor Bob Simison ([email protected])

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