Assessing the Overall Debt Risk of Chinese Local Government Financing Vehicles

Total outstanding debt of Chinese Local Government Financing Vehicles (LGFVs) could have reached RMB60 trillion, yet remains within manageable bounds.  Through data consolidation and analysis, we estimated that the aggregate interest-bearing debt of Chinese LGFVs with bond issuance practices amounted at approximately RMB56 trillion by the end of 2022. Considering the unaccounted portion of LGFVs that have not issued bonds or lack sufficient data, a reasonable projection places the total size of interest-bearing debt for LGFVs nationwide at around RMB60 trillion. Notably, a significant portion of this debt, nearly 80%, constitutes long-term liabilities, aligning with the inherent operational nature of LGFVs. While LGFV debt is classified as corporate debt under regulatory policies, implying that the government is not obligated to provide direct support, the substantial importance of LGFVs to the government and their close affiliation inherently embed a strong expectation of government support. Consequently, the magnitude of LGFV debt carries potential implications for the Chinese government's financial landscape. However, despite the substantial scale of RMB60 trillion, we maintain a measured perspective and do not perceive an immediate cause for alarm. Firstly, even without considering the debt-servicing capacity of LGFVs, incorporating the total LGFV debt in the broad debt of Chinese government, the ratio of China's broad government debt to GDP stood at approximately 100% by the end of 2022, which remains relatively manageable. Furthermore, the Chinese government exhibits robust control over monetary policies and possesses the ability to manage risks due to the creditor structure of LGFVs, primarily dominated by local banks. Secondly, recent years have witnessed tightened regulations on LGFV financing, resulting in a significant deceleration in the growth rate of interest-bearing debt. In 2022, the scale of LGFV interest-bearing debt expanded at a more moderate pace of 7.5%. Looking ahead, we anticipate that the overall policy stance of “deleveraging existing debt while restraining additional debt” will persist, allowing LGFV debt to maintain a gradual, single-digit growth trajectory in the upcoming years.  The eruption of systemic risks stemming from LGFV debt is highly improbable, although localized risks warrant close attention.  Firstly, the regulatory policies governing LGFV debt exhibit a relatively low level of policy risk. Through the introduction of comprehensive regulatory measures, subsequent policy adjustments, and market assimilation over the past few years, the policy landscape has progressively stabilized, fostering a stable predictability among market participants. Secondly, the macro-level refinancing risk associated with LGFV debt remains reasonably manageable. Currently, domestic banks represent the primary creditors of LGFVs, and China's robust savings rate facilitates the continuous expansion of banks’ balance sheets. As long as policy stability endures, banks' risk appetite towards LGFVs is expected to remain stable. Furthermore, the deceleration in the growth rate of LGFV debt to single-digit figures allows incremental bank facilities to adequately cater to the overall refinancing needs of LGFVs. Thirdly, LGFVs face notable interest payment pressures, yet overall, they are capable of maintaining a relatively balanced financial position. Analysis of the average coverage ratio of EBITDA plus government subsidies against interest expenses for the period spanning 2017 to 2022 reveals an average coverage of 105%. This underscores LGFVs' ability to sustain a tight balance in their debt repayment cash flow. However, some LGFVs with weaker liquidity may necessitate additional borrowing to fulfill interest obligations. It is worth noting that the average financing interest rates for LGFVs in recent years have hovered around 5%, significantly surpassing the average issue yield of approximately 3% for Chinese local government bonds. The relatively elevated interest costs amplify the burden of interest payments for LGFVs and inadvertently increase the pressure on local governments to extend support. Fourthly, while the macro-level LGFV debt risk remains controllable, the overall constrained cash flow and divergences in economic, fiscal, and debt conditions across different regions underscore the significance of localized risks.  The "Package of Debt Resolution Policies" can be seen as a strategic approach aimed at effectively tackling the underlying challenges of LGFV debt  The "Package of Debt Resolution Policies" introduced by the central government is a targeted measure to address the current debt issues of LGFVs and alleviate implicit pressures on local governments. It demonstrates a strong focus on resolving these challenges effectively. By utilizing low-interest, long-term local government bonds to replace high-interest, relatively shortterm LGFV debt, this policy aims to achieve several key objectives. Firstly, it contributes to reducing the scale of implicit local government debt, facilitating a shift towards more transparent and visible debt obligations. This increased transparency enhances the understanding and oversight of the debt landscape. Secondly, the policy helps alleviate the debt repayment and interest burden on LGFVs, thereby enhancing their financial liquidity and reducing the associated debt risks.   However, it is crucial to acknowledge that the debt resolution approaches focused mainly on debt replacement may not result in a substantial reduction of the overall local government debt ratio. Moreover, it may introduce moral hazards and concerns about the potential for a continued expansion in the LGFV debt scale even with the resolution approaches. Nonetheless, it is important to note that significant efforts have been made in recent years to implement effective financing controls, aiming to strike a balance between managing debt levels and facilitating sustainable development. These measures have helped curtail the growth rate of LGFV liabilities. Consequently, the possibility of a significant expansion of LGFV debt following the debt conversion process is low.  Furthermore, the August report from the State Council explicitly emphasizes the need to prevent a simultaneous increase in hidden debt scale while implementing the debt resolution plan. This indicates a commitment to maintaining discipline and prudence in debt management practices. Looking ahead, it is anticipated that further measures will be introduced to complement the debt resolution policies, particularly in regions with higher debt ratios and greater debt conversion intensity. These measures are expected to tighten LGFV financing of these regions. 

概要

 推测全国城投有息负债总量达60万亿，整体规模仍在可控范围  经整理统计，截至2022年底，全国已发债城投企业的总有息负债为56万亿元。考虑到全国未发债、无数据的部分城投的有息负债预计仍有一定规模，推测全国城投有息负债的总规模在60万亿左右，其中近八成为长期负债，符合城投经营特性。虽然根据监管政策，城投的负债属于企业债务，政府不为城投债务兜底，但是城投公司无论从对政府的重要性还是与政府的联系来说，都暗含了较强的政府支持预期，城投债务规模会对政府产生潜在压力。然而，60万亿规模虽大，我们认为仍在可控的范围。首先，即便抛开城投自身的偿债能力，将60万亿城投负债全部计入广义政府债务的计算中，中国2022年底的广义政府债务与GDP之比约100%，仍相对可控。且中国政府有很强的货币政策把控能力，以银行为主的债权人结构也有利于政府进行风险管理。其次，随着近年来城投融资的管控收紧，城投有息负债的增速已被有效遏制。2022年城投有息负债的规模增速下降到了7.5%。预计监管“化存量，控增量”总体政策不变，城投的负债规模在未来几年有望维持个位数的缓增。  城投债务不大可能爆发系统性风险，但需关注局部风险  第一，城投债务监管的政策风险不大。经过过去几年的城投债务监管政策的相继出台、政策调整和市场消化，政策面趋于稳定，市场参与者也对此形成了稳定的预期。第二，宏观上的再融资风险相对可控。目前城投公司的主要债权人为国内银行，而持续扩大的存款总额使得银行的业务发展有持续的扩表需求。我们认为只要政策保持稳定，银行对城投的风险偏好将保持不变。随着城投债务规模增速下降至个位数，增量的银行资金能够满足城投整体的再融资需求。第三，城投面临的付息压力不小，但大体仍能够维持资金平衡。我们计算2017-2022城投的EBITDA+政府补贴对其利息支出的覆盖比率平均数为105%，反映出城投的偿债现金流保持紧平衡，部分流动性较弱的城投则需要新增借款去偿还利息。过去几年来城投的平均融资利率保持在5%左右，大幅高于地方债目前3%左右的平均票面利率。相对较高的利息成本增加了城投的付息压力，也无形中增加了地方政府对城投的支持压力。第四，虽然宏观层面的城投债务风险可控，但整体偏紧的现金流和不同区域间的经济、财政和债务等方面的差距导致的区域风险不容忽视。  “一揽子化债政策”是打蛇打七寸  中央推出的“一揽子化债政策”对解决当前城投的债务问题、缓解地方政府隐性压力有较强的的针对性。我们认为以低利率的、长期限的地方政府债券去置换高利率的、相对短期的城投债务，一方面有利于降低地方隐性债务规模，使得隐性债务显性化，增加透明度；另一方面有利于减轻城投的偿债付息压力，提高城投的流动性，降低债务风险。然而，以债务置换为主的化债措施并不能实质降低地方政府债务率，同时可能滋生道德风险，引起“越化越多”的担忧。但我们认为，经过几年“开前门，堵后门”的融资管控，城投的负债增速已被遏制，化债后出现新一轮大幅城投债务扩张的可能性较小。同时8月份的国务院报告明确，实施一揽子化债方案后，要防止一边化债一边新增。预计后续随着配套管控措施的出台，未来债务率较高、化债力度较大地区的城投融资可能进一步收紧。  注：本文译自英文版报告。若有分歧，以英文版为准。