China’s Local Government Investment Vehicles, perhaps not just a local problem?
China-watchers will be familiar with LGIVs (or, LGFVs) — they are the financial vehicles through which China’s local governments borrow from banks to fund their stimulus/infrastructure projects. And they’ve been a source of China concern for a while now, the worry being that Chinese banks will be left on the hook for these off-balance sheet vehicles if local governments can’t pay up.
China’s National Audit Office, for instance, said in December 2009 that of the 1,981 projects it had audited, CNY9bn ($1.32bn) of local matching funds was missing, or about 46 per cent of the planned investment.
Standard Chartered analyst Stephen Green has been pursuing the local government theme for some time now. And he recently sat down to tea with an unidentified Chinese county official.
And he asked him, rather pointedly, if his local seat had a debt problem:
Q: Do you have a debt problem?
A: Our finance bureau has about CNY 300mn ($44m) in bank loans – CNY 100mn from one of the policy banks, and CNY 200mn from international multilateral banks.
Wait a second — local governments aren’t meant to be able to borrow from foreign banks.
Q: We thought the Ministry of Finance (MoF) had banned local governments from borrowing from foreign banks?
A: Oh yes, we can’t do that anymore. But we still have the loans and we have to pay the interest. We don’t have a choice about that – otherwise there would be a problem. If you don’t pay that, the MoF can take the funds you owe out of the transfers it gives you.
[Stephen Green: He implied, we believe, that a political problem exists, since a default on a multilateral loan would be very embarrassing, especially when everyone is so focused on the local government debt problem.]
Yes, err, embarrassing.
To say the least.
Related links:
China’s locals on a locally-generated crisis – FT Alphaville
The Chinese SIV - FT Alphaville
China’s great central economy, and big local problems – FT Alphaville
GITIC Bond Default Shakes China Creditors – NYT, 1998